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trade liberalization in Pakistan

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									                   FINANCIAL INSTITUTIONS


                           Final project


Topic:
                THE IMPACT OF TRADE LIBERALIZATION ON THE ECONOMY
                                   OF PAKISTAN



Submitted to:
                     SIR. S.M. ZAHID



Submitted by:
                     HINA KHAN             (BBA F7- 27)

                     SYED SALMAN NASEER    (BBA SP07- 071)



Submission date:
                     19TH MAY 2011




                       Management Sciences

         COMSATS Institute of Information and Technology

                              LAHORE
INTRODUTION:

Trade liberalization is for the benefit of all countries. Its goal is a country can export its
abundant products and import scarce. But some studies are in favor of trade
liberalization and some are against it.

In some studies authors argue that due to these policies the small and medium
domestic firms were being ignored by government. And these countries faced increase
in poverty.

According to economists trade liberalization policies divided the world into two groups,
developing and industrialized( developed). These economists stated that trade
liberalization has both positive and negative impacts on growth.

Romain wacziarg and Karen horn welch’s study shows that as compare to 1990s the
countries are going to adopt open trade policies. In 2000 there are more countries which
are open to international trade.

The study shows that due to trade policies openness and rise in GDP the growth raised
in different countries. Due to trade liberalization policies growth is notified in some
countries but some countries experienced negative or no growth.

Trade policies in developing countries have positive relationship between export growth
and economic growth. Expanding manufacturing export has positive effect on economic
growth. Some strategies have enabled countries to expand their exports.

In the early years after establishment of Pakistan its economy was instable and weak.
So government of Pakistan adopted restricted trade policies to strengthen its domestic
industries.

In 1960s the domestic industry started in country and some policies were introduced to
encourage exports.

In 1970s the expansions of manufacturing industries slow down because of
nationalization of some industries. To encourage export three additional trade measures
were introduced under which: the Pak rupee devalued by 57%, the export bonus
scheme were eliminated and to fasten the exports the restrictive license scheme was
eliminated.

In 1980s the Government focused on the role of private sector, efficiency of domestic
industries and promoting exports.

In Pakistan the trade policies in 1950s- 1970s were highly protection policies. The
purpose of these policies was to protect infant industries against foreign competition.
From 1987 the protection start declining and trade was liberalized. Through an
agreement of SAP with IMF regarding trade liberalization trade reforms were
introduced. Review of key indicator shows that Pakistan performs well after these
reforms.

In Pakistan during 1950s export received no attention. In 1960s it grew at rate of 10.7%
per anum. In 1970s it grew at an average rate of 22.3% per anum. 1990-2002 a
downward trend recorded in economic growth but from 2002- 2006 GDP increases, i.e.
till 1998 its growth is less as compare to 1970s, and e.g. in 1980 it grew at 8.5% per
anum and in 1990s at 7.6% per anum.

The 60 years average growth rate was 5.27% per anum. But this percentage of growth
was less as compare to other 10 developing countries, especially in manufacturing
exports Pakistan was at weak position.

But in 2000 the Pakistan appeared as one of fast growing country, its economic growth
rates have risen 1.8% to 6%-7% per anum in 2000 and 2001.

2006-07 the manufacturing trade growth grew by 15%. Due to Open trade regime
imports could be triple. Fiscal deficit reduced by raise the tax revenue. And external
debts have decreased and the incidence of poverty has fallen.

According to World Bank Pakistan’s recent reforms have been substantial.( EABER
2008). Its trade regime is more open. It has lowest tariff rates.
Pakistan eliminated all duties and policies that restricted trade. The speed of tariff
reduction is very fast. And under monopoly condition state trading has been restricted to
a few items only. Export facilitation and promotion was the focus of export policies.

LITRATURE REVIEW:

During the promotion era of free trade the poverty in developing countries has
increased. Some economists argued that due to high export tariffs on products of
developing countries their export market was down. According to World Bank after trade
liberalization per capita income has increased by 5% and debt ratio of least developing
countries is more due to less trade.

A researcher Krueger addressed positive relationship between free trade and economic
growth. She has addressed in the era of 1950s and 1960s that the import substitution
policy was to make countries developed. She stated that the trade policies were badly
interpreted and implemented.

In another paper Rodrik argued that there is no any relationship between growth and
trade.

The differences between economist’s arguments are due to their views that when and
how trade policies should be implemented. Rodrik believe that each country should
have its own investment strategy and trade policy and each country should adopt its
own policy. Rodrik has his own principle that every country should be protected from
external pressure and they should have rights in choosing their own development
priorities.

Jeffrey Nugent argued that fewer countries have implemented trade liberalization
policies. He stated that least developed countries considered that these policies are
beneficial for just developed countries. They considered that their export would decline.
He stated that during 1980s and 1990s for the purpose of trade liberalization more than
60 countries has received loans.

The countries that followed trade liberalization have chosen one of two strategies, i.e.
one was more radical path and the second one was elements of partiality.
In case of Pakistan in early years trade policies were for the protection of infant
industries. Import substitute policies protected in fact industries and changed high tariff
against exports. Import substitute and export promotions were for eliminating
discrimination between production for export and domestic market.

The trade regimes followed in Pakistan from 1950s to 1980s is well documented. And
we need to study these regimes.

After 1947 the Pakistan’s industry was just a few sugar mills, textile mills and cement
factories.

During 1950s Pakistan followed import substitute strategy for the protection of
industrialization. Pakistan was poor in industries but rich in agricultural resources. So
the large part of revenue came from taxes on export of agricultural resources. And on
import of manufacturing goods the duties were changed so more revenue was
generated.

The policies were designed in a way that the domestic manufacturer used to buy raw
material at below price than world and sell their products at above price domestically.
This resulted more tax on exports.

During 1960s government began to promote export. For this purpose government firstly
introduced export bonus scheme in favor of exporters of manufactured goods.
Secondly industries which were having the potential of export were singled out for doing
foreign                                                                         exchange.
Thirdly import was liberalized but a policy was formulated that import license will be
issued for consumer goods and industrial raw material. The firms which were best in
exports got the import license. But after these measures the liberalization was
discriminatory. Just large manufacturing companies and industries grew during this era.

During 1970s three measures to increase exports were taken i.e. devaluation of money,
bonus scheme for export was eliminated, licensing for trade was eliminated.

The bonus scheme was to encourage exporters from overvaluation. The elimination of
bonus scheme was an effort towards uniform exchange rates for exports.
These measures were to encourage exporters to divert their export from small market to
the world market.

During 1980s continuous effort took place to make the trade liberalized. For this
purpose different steps were taken to increase exports. The average tariff rate has
declined. A significant step was the improvement and increase of imports. 1980s was
the most restrictive period for import regime. The domestic products were valued due to
the restriction and import duties.

Two types of measures were used for all these activities: Firstly non-capital imports and
import quotas were removed and secondly restricted and banned imports were
liberalized.
In July 1983 the government switched to negative from a positive list system, which
listed restricted and banned imports.

Due to all this the import competing firms were protected and the imports of luxury
goods were restricted. The import restriction created a gap between international and
domestic prices the foreign competition was eliminated in industries.

Due to trade restriction smuggling and other illegal businesses took place.
In 1989 the tariff reduced, the duties on imports were eliminated. Main political parties
were involved in implementing the reforms in 1990s.

To encourage export growth the exchange rate shifted from fixed to flexible. During this
era Government focused on the role of private sector, efficiency of domestic industries
and promoting exports.

From 2000 to 2003 new policies were promoted to make the macro economy stable and
to increase the export of trade services.

To liberalize and enhance trade Pakistan has concluded some regional and bilateral
agreements. These were:

      Agreement on South Asian free trade area.
      Preferential trade agreement with Iran.
       Preferential trade agreement with Mauritius.
       Free trade agreement with Sri Lanka.
       Free trade agreement with Malaysia
       Free trade agreement with China.
       Early harvest program with Malaysia.
       Early harvest program with China.
       ECOTA
       Framework agreement on trade. (CSS Forums).

Some efforts have been made to market access in the European Union. These were:
Pak- EU FTA, Market access Initiative in NON-EU countries. And Russia

The objective of trade policies in 2009 and 2008 were to reduce poverty and increase
import export and its earnings, improve competitiveness and increasing market access.
Different import and export policies were formulated to achieve these goals.

These trade policies were having both positive and negative effects on economy. It
reduced poverty through increase in productivity and investment but has increased
unemployment and inequality in income.

Economic growth is effected by trade liberalization through various ways. Due to this
productivity in country could be increased which leads to increase in employment. So
poverty could be reduced. Trade liberalization policies resulted in increase in investment
so consumers are having option of selecting goods at competitive prices.

Pakistan has reduced tariffs since 1987 and now the tariff is almost 17%. Pakistan’s
exports are very less. After 1990s exports shifted from semi and primary manufactured
to manufactured goods.

During 2003- 2005 the percentage of imports increased. Till 2006 the import deficit was
high.

Since 2000 the current account is positive but in 2004- 2006 it is negative due to high
prices of oil imports etc.
Due to trade liberalization the poverty get affected directly through its impact on jobs,
cost of living and indirectly through capacity utilization. High capacity utilization
observed in automobiles and electronics.

During 2001- 2005 rural poverty declined from 39.25% to 28.1% and urban poverty
declined from 22.69% to 14.90%. It shows that during 2001- 2005 the Pakistan’s growth
performance was impressive and people had employment opportunities.

CONCLUSION:

Economists are agreed with the positive relationship between trade liberalization and
growth but the conflict is at which stage and time they should apply these trade
liberalization policies. And the other factor is just industrialized countries are the
beneficiary of trade liberalization. The WB, IMF, UNCTAD is focusing on eliminating
tariffs.

Pakistani exports have grown up at an average rate of 8.7% per anum. But by
comparing with other countries we came to know that this growth is less than other
developing countries. The export of a country shows its position and economy condition
and Pakistan has been biased in exports.

In 2006 except on sector TCP (Trading Corporation in Pakistan) all public sectors which
are engaged in trading activities have been dissolved. And the allowances in tariff have
been reduced. International trade procedure and costume clearness system were bring
in alliance with international system. Export promotion and facilitation have been the
focus of export policies. Due to all these actions the trade has been increased.

According to study of Social Policy Development Centre (SPDC) the trade liberalization
had no adverse impact on income inequality and poverty in Pakistan. The foreign
investment increased in Pakistan but due to this the income inequality has increased.
Some industries have suffered due to trade liberalization but by necessary adjustments
the gain is higher e.g. the reduction in tariff in imports is equalized by increase in
indirect and direct tax revenue.
Import barriers has been declined and maximum tariff rates has been declined. The
costume duties have reduced. But still there is need of more effort so that trade regime
would be neutral. There should be policies for Pakistani exporters that they could have
free access to the international market and imported inputs. There is a need of open
trade regime to attract foreign investors for FDI in export-oriented industries.

We can say after studying all factors and points of trade liberalization that Pakistan’s
economy is now started reaping the benefits of trade liberalization policies.

The globalization puts positive impact on Pakistani economy. GDP, employment
opportunities, trade volume and per capita income are increasing.

The main achievement is decline in poverty.

REFRENCES:


      Liberalization of the international trade and economic growth implications for both
       developed and developing countries ,Vlad Spanu
       http://www.cid.harvard.edu/cidtrade/Papers/Spanu.pdf

      The experience of trade liberalization in Pakistan, Ashfaque. H. Khan.
        The Pakistan Development Review. 37: 4 Part ii (Winter 1998) pp. 37:4. 661-
       685, http://ideas.repec.org/a/pid/journl/v37y1998i4p661-685.html

      Pakistan's Trade Liberalization Experience, Ishrat Husain, july2008.
        EABER_Newsletter_July2008.pdf(SECURED)

      Global Trade Liberalization and the Developing Countries, By IMF Staff ,
       November 2001
       http://www.imf.org/external/np/exr/ib/2001/110801.htm

      The Environment as a factor of production: The effect of Economic Growth and
       Trade Liberalization, Ramon Lopez
         Journal of Environmental Economics and Management 27, 163-184 (1994)
       http://ideas.repec.org/a/eee/jeeman/v27y1994i2p163-184.html

      Trade liberalization and economic reform in developing countries: structural
       change or de-industrialization?
       http://www.unctad.org/en/docs/osgdp20053_en.pdf
      Trade Liberalization and Poverty in Pakistan, Akhtar Mehmood and Farkhanda
       Sohail
       http://www.aitd.com.pk/publications/Trade%20Liberalization%20and%20Poverty.
       pdf

       Trade liberalization in Pakistan, historical review of trade liberalization in Pakistan
        http://www.cssforum.com.pk/css-optional-subjects/group/economics/28937-
trade-liberalization-pakistan.html

      TRADE LIBERALIZATION AND GROWTH: NEW EVIDENCE, Romain Wacziarg,
       Karen Horn Welch, Working Paper 10152 , http://www.nber.org/papers/w10152


      Trade Liberalization and Poverty Reduction in Developing Countries:The Case of
       Africa, Salah T. Mahdi, World Trade, World Poverty:Third Conference of Institute
       of Human Rights
       http://www.ipfw.edu/hri/WTO/WTO-Mahdi.pdf

								
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