By Ijaz Nabi
Insufficient export performance is a major contributor to balance of payment crises that slow job creation and economic growth in Pakistan. The textiles and readymade garments industry has the potential to significantly improve overall export performance and create jobs for the million-plus new entrants into the labor market every year. Garments currently account for half of Pakistan’s exports, 30 percent of value added in large scale manufacturing, and 40 percent of industrial employment,
To help make Pakistan’s garments exports more competitive, the International Growth Centre (IGC) commissioned several studies to assess the performance, growth potential, and hurdles faced by firms in the readymade garments sector – the highest value-addition, least energy intensive, and highest job-creating segment of the textiles industry.
Here are some key findings from the research:
A lack of competition is resulting in low value products
The 2013 study, “A Comparative Analysis of the Garments Sector in Pakistan”, found that a lack of competitiveness has resulted in the garment sector supplying low value products to international markets. To come to this conclusion, the study built a profile of garments manufacturers in Pakistan based on a survey of 234 randomly selected firms from Karachi, Lahore, Faisalabad, and Sialkot (all major industrial centers) and compared it to similar firms in Turkey and Bangladesh. Researchers gauged the relative quality of garments manufacturing across the three countries based on indicators of competitiveness such as product mix, diversity of export destinations, expertise of the work force, cost of production, functioning of regional manufacturing clusters, and effectiveness of government policy.
While Pakistani firms have shown good growth in recent years, they lag behind comparator country firms on many important indicators of competitiveness. Pakistani firms are consequently focused on the low price segment of the market with insufficient export diversification. Using the global value chain framework, the study shows that most Pakistani garments manufacturers supply low value products to retailers, brand manufacturers and brand marketers with only a few having the capability of design manufacturing. For the large number of small firms this is due to the high cost of upgrading technology and, in turn, poor access to formal finance to do so. The agglomeration benefits of cluster formation, that might increase capabilities of firms located in Karachi, have not been realized due to poor law and order that increases transaction costs. The severe energy crisis has also not helped. Strengthening capabilities will be vital to becoming part of the value chain of a global garments market that is estimated at $133 billion, growing at 12 percent annually and with China poised to vacate its share of 26 percent of the market.
How successful garments manufacturers operate, and what they need to improve
A follow-up study, “Garments as a Driver of Economic Growth”, conducted detailed interviews with 20 knitwear and 13 woven garments manufacturers located primarily in Karachi and Lahore. This provided rich insight into the growth path of firms, the critical turning points, and the entrepreneurial ingenuity that enabled firms to take advantage of opportunities. It also revealed the biggest policy constraints to improving exports as perceived by firms. Analysis of the interviews shows that garments is a modernizing industry connecting educated, aware Pakistani entrepreneurs with rich consumer markets through well-established brand names. Many firms produce to global standards, some have developed niche markets, and a few have advanced design capabilities. Information technology is used extensively to overcome connectivity hurdles and reduce turnaround time. Resourcefulness and ingenuity have enabled successful firms to mitigate the economic and political risks perceived by importers in placing orders with Pakistani manufacturers.
There is a strong belief among successful firms interviewed for the study that Pakistan could increase its global garments share manifold and make a significant contribution to exports and employment. However, it is stressed that the success of a few firms is not enough to realize the scale effects of a modern garments industry. That will require committed policy intervention to enhance the international competitiveness of the sector as a whole. The areas that need policy attention are: Customs procedures, the skills gap, government incentives and policy consistency, law and order, facilitating buyer visits, and negotiating market access.
Policy implementation: Where it worked and where it struggles
A third study, “Implementing Polices for Competitive Garments Manufacturing”, tracked the policy process to assess the influence of analytical work in changing policy. It also assesses the impact of one of the recommendations of the earlier study (improve market access) on export performance and expands the case studies to include firms in Sialkot, a cluster of innovative firms manufacturing sportswear not covered in the previous research. Firms’ assessment of the policy implementation process was recorded in additional interviews conducted in all three of Punjab’s industrial clusters: Lahore, Faisalabad, and Sialkot.
The Punjab Chief Minister’s provincial growth strategy, 2013-18, stressed the importance of export-led industrialization for employment generation and drew upon the studies cited earlier that argued for a large role of garments in achieving that objective. Keen to engage in the rollout of a comprehensive program to support garments manufacturing in the province, the Chief Minister chaired a meeting¹ of senior Punjab policy makers, civil servants, garments manufacturers, and researchers affiliated with the International Growth Center (IGC) and the Consortium for Development Policy Research (CDPR). During the meeting, the recommendations of the previous IGC/CDPR studies were endorsed and the Chief Minister announced a steering group headed by Chairman, Planning and Development, to oversee the implementation of policies in each of the recommended areas that were further fine-tuned as: market access, trade policies and customs procedures, skills, energy, and cluster formation. Five sub-committees were formed to roll out the policies.
Did the roll out work? Following the subcommittee implementation of market access reforms that strengthened federal submissions of evidence of compliance to the European union, Pakistan was awarded the GSP plus status in December 2013. As a result, Pakistan’s garments exports to the EU grew much faster (11 percent annually) than exports to the rest of the world (1.5 percent). Progress is also satisfactory on cluster development as Quaid-e-Azam Apparel Park takes shape. Along with improved market access, this will promote Chinese investment in Pakistan’s garments manufacturing through the China-Pakistan Economic Corridor (CPEC). On skills, the Punjab Skills Development Fund is developing training programs tailored to the needs of the garments industry. While there has not yet been substantial improvement in the energy situation, large investments are being made in power generation in Punjab which will bring about significant improvements in the coming months.
Less impressive is the progress in the critical area of trade policies and customs procedures. Imports of raw materials remain heavily regulated, duty drawbacks are cumbersome and customs procedures continue to be burdensome. The anti-export bias in exchange rate management is worsening with the continued appreciation of the rupee.1 One step in the right direction, however, is the recent easing of access to raw materials for garments manufacturers and better customs procedures in CPEC special economic zones.
The need to address the difficulties faced by garments manufacturers in the area of trade policies is critical but lies in the federal domain. Provincial governments, even Punjab with its strong political affiliation with the federal government, will need find ways to work with Islamabad to improve the overall policy environment for garments manufacturers so that the sector can realize its full potential for export growth and employment generation. This includes better macro-economic management to avoid balance of payments crises that shrink the policy and fiscal space to support growth.
Ijaz Nabi is Pakistan Country Director at the International Growth Centre and Chairman of the Board of Governors of the Consortium for Development Policy Research.
1 Hamid, Naved and Mir, Azka Sarosh. ‘Exchange Rate Management and Economic Growth: A Brewing Crisis in Pakistan’, The Lahore Journal of Economics, 22: SE (September 2017): pp. 73-110.
Surely the Good Pakistanis will not the mistakes of the Hindoo Dindoo Indians and their disasters in exports and SEZs
India is doomed and the Indian SEZs are doomed.
• The pathetic state of the exports from the SEZ is assessed by the number of non-operative units and the poor capacity utilisation of the SEZ units – information about which is in public and national interest
• The laqck of planning of the GOI is highlighted by the fact that the GOI has done no benchmarking of the operations of the SEZ per se, and the SEZ units within – for each sector with comparable peers,in India or the global competition
• If a sector, say X,exists in a SEZ in a specific maritime geography and its global export hub,is in Country A, and the GOI has not been benchmarking the operating parameters of the Indian SEZ and the SEZ units of that sector (X),every 3 years – then the SEZ units in sector X,in India,will definitely cease to exist,or be in a state of terminal decline or exist at the mercy of competitors
• With the miserable performance of the Indian Rupee,and its impact of reduction in Dollarised Rupee costs payable to the SEZ authority by the SEZ units – why are the exports from the SEZs still a failure? In addition, in several sectors, the rupee costs paid by the SEZ units to the SEZ Authority,are not the determinant for operating and financial viability of the SEZ units
• In essence,the GOI has utterly failed to provide a level playing field to Indian exporters,in terms of admin costs,operating cost neutrality,financing costs,effective logistics costs and fiscal red tape and procedures
• The centres of manufacturing excellence near SEZs (For CMT/Job work/Material and Labour sourcing) are not cost effective – as there is no synergy between the SEZ and the Industrial planning and policy
• The strategy of the GOI is highlighted by the fact that the GOI has engaged no 3rd party to analyse the inefficiency of the operating parameters of SEZs and the SEZ units within the SEZ – for each sector within it , with comparable peers in India,and the global competition
• What planning and strategy will the GOI do,if it has no formal analysis of the specific operating costs,parameters,management and other issues,which explain the dismal state of the SEZ units by sector,scale and management quality
• The dismal state of the GOI planning is that it has not properly planned the sector profile of the units in each SEZ, to ensure that the right sectors are in the appropriate geography,in the right SEZ,to minimise the net logistics costs on the EXIM chain, and minimise the inward material logistics costs – considering the future dislocations in inward and external material sources and options of transhipment and alternative export markets
• Several SEZs elsewhere invest limited equity in SEZ units and common service providers,like banks,facilities,hotels,accounting firms etc,as a demonstration of their stake in the SEZ and their strategic inputs in the planning and operation of the same – which is then used to lower the lease charges – which is completely absent in India
• All of the above is to be seen in light of the fact that the SEZ has no data of the financial or operating performance of the SEZ units,loss making units or even the financial and operating performance of the Developers of the SEZ – and is naturally not concerned with the losses or the financial performance of the SEZ units therein
• The peculiar pattern of CMT and Job workers of key sectors such as Gold and Diamond jewellers,with multiple movement of stocks at different processors o/s the SEZ – is not the norm for Gems and Jewellery SEZs or SEZ units – and represents an abnormal industrial agglomeration with a planned and structural dislocation in manufacturing and processing operations – which cannot be solely for the purposes of manufacturing and commercial efficiency.
• Information on raids and prosecutions is critical especially in sectors with high import duties (on merit mode) for inputs,customised finished goods (wherein DRI/Customs cannot assess over invoicing),frequent movements to and from 3rd party processors (which makes the case for wastages and losses in SION and disappearing materials), materials where the EXIM transit time is a few hours and the logistics costs are less than 1per cent of CIF/FOB rates, inputs and outputs with marked differences in rates of different grades of items and offgrades,warehousing artificial losses,amortisable costs ,bad debts and write offs in select SEZs (to be used for 3rd party exports or mergers to obviate tax on SEZ profits),items where the SEZ units are well aware of the sampling and test checks of the DRI and Customs at the SEZ for the inputs and outputs etc.
• The Gems and Jewellery industry is run by cartels from a particular community spread from Western India to North America,EU,East Asia,West Asia and Africa and is a well coordinated money laundering and smuggling operation from the state of rough diamonds and raw gold,to the marketing of jewellery and warehousing of processed and raw diamonds,the banking chain,raters and the chain of associate and front companies – which is all the more insidious,as all the data with DRI/ED/Customs/Interpol used by the Indian State for surveillance all originated from the overseas counterparts and partners of the Indian traders located in India (who are in many cases – in spirit the same de facto entity owners)
• The premise that Indians are the least cost labour source for the jwellery sector and their informal working style (w/o documentation,using informal labour and in slum style conditions) is an innovative marvel of Indian genius,is a pathetic deception,and the entire array of fiscal and monetary sops for this sector (including SEZ) allows the sector to generate financial buffers via money laundering,tax arbitrage,treasury operations, merchanting exports,accomodation financing ,cash financing, alternative fund transfers,FX speculation,leveraging double and layered financing,defrauding Indian Merchant exporters such as STC and MMTC,Credit insurance fraud etc. which provide the sector a pricing edge in overseas markets ( via illegal,nefarious and fraudulent means)