Shahid Ali 803-MBA-2011

COMPETIVENESS OF PAKISTAN
Competitive Advantages Pakistan is the land of opportunities abundant with plentiful natural resources. Pakistan is also in the list of those countries that are equipped with nuclear power. I would like to discuss competitive advantage of Pakistan in three perspectives i.e. Business Environment Economic Outlook Investment policies, laws and regulations Business Environment

Pakistan is located in the heart of Asia, it is the gateway to the energy rich Central Asian States, the financially liquid Gulf States and the economically advanced Far Eastern tigers. This strategic advantage alone makes Pakistan a marketplace teeming with possibilities. Well-established infrastructure and legal systems are deep-rooted foundation to lure investment. It includes comprehensive road, rail, sea links; good quality telecommunications and IT services; modern company laws and long-standing corporate culture. A composite scheme of National Industrial Zones engulfing industrial estates, Free Industrial Zones, Free Trade Zones and Export-Oriented Units (EOU) and Estates for small and medium industries within areas of its boundary has been launched to promote exports. In addition, establishment of export-oriented units will be allowed to be set up all over the country. Foreign investors are allowed participation in industrial projects, on the basis of 100% foreign equity, without any permission from the Government. The policy regime has been liberalized by opening up other economic sectors to FDI and by mobilizing domestic financial resources to encourage investment. Real GDP growth is estimated to grow at 2.4%, due to considerable growth in the services sector of the economy. Small and Medium size enterprises in the manufacturing sector have seen an expansion of 3% in 2010-2011 due to high demand in the domestic and international markets.

Economic Outlook

Large and growing domestic market includes 174 million consumers with growing incomes and a growing middle-class moving to sophisticated consumption habits. Abundant land and natural resources exists in Pakistan including extensive agricultural land, crop production; wheat, cotton, rice, fruit and vegetables; mineral reserves; coal, crude oil, natural gas, copper, iron ore, gypsum; and fisheries and livestock production. Tourism has been declared an industry and as such holds great promise for prospective investors interested in exploring the true potential of a land as rich and diverse in its culture as it is in its geographical distribution.

From snow-capped mountains in the north, with vast fertile plains of the Punjab, rugged land of the south, deserts and a long seacoast, Pakistan has all the hall marks to become a major tourist attraction.

Shahid Ali 803-MBA-2011

Investment policies, laws and regulations

Modernizing of capital markets and the development of new infrastructure. Improvements to the regulatory environment will allow for a much more improved system. Liberal foreign exchange regime with few restrictions on holding foreign exchange. Abundant land and natural resources Zero import duties on capital goods, plant and machinery and equipment not manufactured locally. A Labour force which provides a suitable foundation for business growth, due to Pakistans young, dynamic and skilled workforce with bi-lingual skills. Comprehensive logistical network with road, rail and sea links to transport your goods to domestic and international markets Strategic location as a regional hub for southern Asia and the Middle East. Regulatory reforms have led to the establishment of a legal framework for licensing and regulating private housing lenders. The cost of labour in Pakistan is less than China, India and Vietnam, said Hertzman, whose company placed $75 million worth of orders with Pakistani textile companies last year. Top American brands currently outsourcing their apparel manufacturing to Pakistan include American Eagle, Abercrombie & Fitch, Hollister, Nike, Quicksilver, Kohls, Sears, Wal-Mart, Gap, Old Navy and Macys. Another advantage that Pakistan has over its competitors, especially Bangladesh, is good quality, homegrown cotton. Pakistan produces short-staple cotton, which is good for denim, flannels, fleece, knits, polo shirts and t-shirts.

What is hampering / stopping growth in Pakistan? There are different factors that are affecting growth in Pakistan. Some important factors are given below: Unsophisticated Export Basket: Pakistan is specialized in relatively unsophisticated export activities that are typical of poorer countries. The countries that are able to move to a more sophisticated export basket given their level of income enjoy accelerated growth in the future. Compared to other countries in Asia, Pakistan has not been moving to new and better export activities, and consequently fallen behind. This is partially because of the actual products that Pakistan currently produces are intensive in capabilities with few alternative uses. Though Pakistan has comparable GDP per capita income to India, Indonesia but its export package is less sophisticated. This is even truer when comparing its comparison to countries in other regions like China, Philippines and Thailand. It is only in comparison to countries in other regions with similar levels of income (e.g. Central America) that Pakistan has a comparable or favorable level of export sophistication. For its region, Pakistan is lagging. Low Savings According to the New Growth Models of David Romers and others in which higher savings leads to higher. The gross saving

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as percentage of GNI for Pakistan are 23.1 as of FY 2006. This rate is more or less similar to other countries falling in upper middle income (23.1) countries but is relatively less than those classified as middle income (28.3) and lower middle income (32.1) countries. Evidence on the utilization of exogenous inflows suggests that increase in exogenous inflows, particularly remittances, of foreign funds has not fully translated into productive investment rather such inflows have ended up in real estate. The inference that the remittances had found way into the real estate is borne by the unprecedented increase in real estate prices in 200304. The fragile relationship observed between investment as percentage of GDP and National Savings as percentage of GDP (Fig. 1) also supports the argument that Pakistan is not saving constrained. Over the last ten years though the national savings have fluctuated widely the investment rate has remained relatively stable, especially after year 2000. (Since year 2000 while national savings have fluctuated within a wide band of 15.8 to 20.6 percent of GDP, while the investment rate remained within a narrow band of 17.4 to 16.9 percent of GDP). This shows that the investment rate, at least within a certain band, is insensitive to savings and therefore implies that savings rate, if at all low, does not constitute a binding constraint to growth of the economy. Institutional Failure Institutional failure is also a big reason hampering growth in Pakistan. Some of the major institutional failures have been discussed below: (a) Legal Institution Banks in Pakistan have faced huge defaults on amounts lent but the collateral laws have not come to the rescue of the bankers. The poor enforcement of collateral laws is just one example of the failure the legal institutions. Many other cases could be cited to prove the failure of the legal institutions. (b) Land Titles Mortgage Financing (House Building Finance) is gradually gaining ground in Pakistan but only in urban centers. Despite the urge banks have so far failed to introduce mortgage financing in villages. Weaker land titles are at the heart of the near-absence of mortgage financing in villages. Thus due the failure of the legal institutions to do their bit, much needed construction activity, that can contribute significantly to growth, is not being undertaken. (c) Financial Institutions (i) Banks As an illustration of SBP weakness we discuss below SBPs failure to control the rather high interest spread. However this by no means is the only weakness with the system. (ii) Capital markets are intermediaries between savers and investors. In capital markets, one way to channel funds from savers to investors is through Initial Public Offerings (IPOs)___sale of securities in the primary market. In Pakistan the proportion of capital mobilized through IPOs is rather low. The fact that Pakistan is sticking to a least efficient IPO procedure that has lost popularity in the developed world, speaks of the failure of the regulator. Another reason why companies do not go for IPOs is that young and small companies are not able to capture the investors trust. (d) Educational Institutions As per Global Competitiveness Report 2004-05, Pakistan ranks 94th on the innovation index out of 102 countries. This reflects almost no innovation at all. The elite few

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from the O/A level system and from English-medium schools perform better while the vast majority, in general, does not get the right kind of education and is therefore an underperformer. Another shortcoming of our education system is that it is merely focused on imparting knowledge with very little attention to imparting technical skills required by the industry. Thus inappropriate functioning of the educational institutes is a serious impediment to growth. Market Failure Market failure is due the following reasons which are impediments to growth: o Asymmetric Information o Lack of Innovation o Macro Risks / Macroeconomic Instability Which competitive skills should see? There has been a general neglect of the human resource development, Pakistan manifested in low Human Development Index, and the skill development has been most neglected. Pakistan has neither been able to improve vocational and job skills nor could inculcate the creative and cognitive skills and the personal and social skills resulting in loss of output, exports and employment and slow growth of living standards. Various factors have contributed towards the neglect which includes among others inward looking policies with little emphasis on quality products, focus on primitive technologies and choice of economic activities and the limited supply of Skilled workers. Pakistan should try to be competitive in technical skills by utilizing its youth power through promoting well technical educational institutes in all over the country. This alone can help Pakistan in generating skilled labour in Pakistan which can be beneficial to attain growth in GDP as well as foreign reserves if our skilled labour will be demanded by foreign countries. Pakistan is good in furniture making but there is need to update the technological aspects in this skill. There should be training centers to promote this skill in the country to attain competitive advantage over the other countries. Pakistan is also good in making surgical instruments. There is need of proper infrastructure and promotion of this sector which can be very help full in contributing economic growth in the country. Government should start supporting this sector by reducing import and export duties in import of machinery required for this sector and export of surgical products to foreign countries. Which industries / services have potential that needs to be explored? Textiles As Pakistan is one of the major producers of cotton, the country has a sound textile industry. It is apparent from the fact that the textile exports doubled to $10.5 billion in 2007 from $5.2 in 1999. Pakistan accounts for 3% of the United States textile imports. The countrys textile exports are expected to reach $14 billion while employing approximately 6.2 million people indirectly as well as directly. Pakistans textile and apparel manufacturing industry provides employment to 40% of the countrys labor force.

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Mining Pakistan has an abundance of mineral resources and an area of over 6,00,000 km that is projected to have a variety of metallic and non-metallic mineral deposits. In 1995, Pakistan stipulated its first National Mineral Policy that resulted in the expansion of its mining sector. In response to the policy, four international mining companies have already set up their operations in the country. Coal, rock salt, construction material, gold, gemstones and duddar zinc are other major natural products of the mining sector. IT industry The second half of the first decade of 21st century has seen steady growth in the IT industry of Pakistan. Software exports grew considerably in 2007. That year, the industrys worth was estimated at $2.8 billion with an increase in the number of IT companies to 1306. The country also featured in the Global Services Location Index for the first time in 2007, Further, Pakistan ranked as the 30th best off-shoring location in the world and as of 2009, its rank improved to the 20th position. Pakistan has full potential of fetching precious forex of $1 billion every year through promotion of Animation Industry (Video Games Industry) that is full-fledge entertainment industry world over having export potential of $70 billion. In Malaysia Pakistani information technology companies won seven awards at the 10th International Asia Pacific ICT Awards (APTICA) there by securing the highest numbers of awards thus raising the profile of the country and bringing attention to the quality work being done in Pakistan. Applications developed by Pakistani gaming industry are consistently ranked among the top ten applications on Apple Apps Store. Furniture Industry Pakistani handmade furniture is admired among masses for its customary designs, durability and quality. The furniture industry has enormous growth potential. We have excellent craftsmen and designers, who could virtually give life to a piece of wood. We have the finest wood available in country. The furniture industry had exhibited astounding growth during the recent year. However, the country was unable to tap the actual potential. Food Industry According to the Census of Manufacturing Industries there were 924 units engaged in the manufacture of Food and Beverages. According to the UNIDO it is the largest manufacturing industry of the country. Value of production stood at Rs.74.094 billion and manufacturing value added (MVA) stood at Rs.24.287 billion. Food processing is a relatively capital intensive industry. The growth rate in the food industry has been estimated at 10.00 per cent per annum. The most rapidly growing items are dairy products fish processed, bakery items, sugar, biscuits and confectioneries, fruit juices and other soft beverages. Rapid export growth has characterized fish preparation, fruit preserves, dry fruits, some beverages and sugar, and honey preparation. Food products (except rice) do not however, make up a significant proportion of Pakistani exports and there is a considerable potential for expanding such exports, especially to Europe and the Gulf region.

Shahid Ali 803-MBA-2011

How to achieve competitive Advantages and exploration of potentials discussed above? The competitive advantages can be gained and potential can be explored in the industries discussed above through following measures: Government of Pakistan should take solid steps to resolve problems like shortage of electricity and gas which forces the textile exporters not to take orders because not fulfill the orders on time. With these reasons import of textile machinery declined year on year basis. Instead of making and delivering our textile products to the foreign clients we should start making powerful brands and we should start selling our textile products to our own brand names and we should get the benefits which MNCs are getting. Government should support textile industry by providing sufficient finances to this sector to encourage businessmen for the growth of this sector. As we are not known by methods and well equipped to extract our natural resources first we need to do have latest methods and technologies used in mining. In this regard, analysis of joint ventures and foreign investment in the mining sector globally should be undertaken to develop appropriate policy, regulatory and contractual structures based on international best practice to promote private sector investment in the sector. Our IT industry is lacking vision. IT industry needs vision, strategy and target to get success in short, medium and long-term so it can make difference collectively and enhance its sized and growth rate with investment and employment opportunities. The government and IT companies should set exports target for the industry and devise a framework to pursue plans with proper coordinated facilities and integration. Government should start negotiating with Chinese companies to set up manufacturing plants for cell-phone sets in Pakistan. Once deployed, handset plant comes with a package that can do wonders to any economy, as they bring in other industries along, such as, component manufacturers, circuit designers, accessories, packaging, and software industry to cater mobile software requirements, R&D, countless jobs and so on. For the purpose, Government should cut import duties and corporate tax rates, new highways, rail lines, and airports, and most importantly the sense of security for investors Free land for mobile manufacturing plants

Easy access of credit, tax holidays on expansion, frequent road shows and visits to international exhibitions, along with assistance from government officials for marketing furniture in Europe are some of the initiatives that can benefit the industry. The furniture industry is facing shortage of shesham. Government should take action here by directing our forest department to give attention to produce shesham. Our furniture industry is not equipped with latest technologies. Government should given attention to update technological status of this industry to have competitive advantage. To promote Pakistani products in US market participation in exhibition is necessary as US is large importer of fruits and juices. As agriculture produce export offer tremendous opportunities for Pakistan especially for rice, fruits and vegetable preparations and fish products, Pakistan should launch aggressive marketing campaign to promote these products.