ANALYSIS OF PAKISTANI INDUSTRY
INTRODUCTION Trade policies refer to the processes and procedure that monitor the movement of trade in and out of the country. They have been the crucial deciding factor for any countries success as they can make or break the economy. oreover they significantly impa impact ct the the ma!o ma!orr econo economi mic c indi indica cato tors rs of the econ econom omy y such such as "D# "D#$ infla inflatio tion$ n$ employment etc. There are t%o %ays in %hich countries can strengthen their industries and progress to industriali&ation. • •
In%ard looking trade policies Out %ard looking trade policies
'oth these policies are used to gain economic gro%th and industriali&ation ho%ever they are very different in their essence. The policy maker and the economist have to vie% various factors and decide d ecide %hich policy %ould best fit their o%n economy. economy. Countries like India and China have successfully used in%ard looking trade policies in the past$ %hile other countries such as (outh )orea have effectively follo%ed the out%ard looking trade policies. *o%ever *o%ever after after the discou discourag raging ing result result of in%ard in%ard looking looking policy policy in +atin +atin ,meric ,merica$ a$ direction has shifted from in%ard looking policies that support import substitution to out%ard looking policies amongst the less developed countries.
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IN,RD IN, RD +OO)IN" #O+ICI/(0 In%ard looking trade policies focuses on building and developing domestic industries. The government is interested in protecting and helping the infant industries gro% and become competitive in the %orld market by gaining comparative advantage. This can be achieved %hen the opportunity cost of producing that good is lo%er than other countries. This is achieved through high trade barriers and high tariffs on imported goods. There is lo% level of foreign direct investment into the country They rely on import substitution industriali&ation 1I(I2 is a trade and economic policy %hich advocates replacing foreign imports %ith domestic production. I(I is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industriali&ed products They provide subsidies to domestic firms f irms and try to build on economies of scale in order to lo%er their cost of production. This makes the country more competitive %hen the government decides to lo%er protectionism and enter foreign markets. India also follo%ed this policy in the 34456s. oreover$ 7apan$ import substitution meant developing strong motor vehicle and consumer electronics industries %hich helped them come stronger %hen they entered the international market. *o%e ever$ the in%ard looking trade policy failed in the case of +atin ,merica %hich discouraged most of the less developed countries from opting to%ards the policies.
ADVANTAGES OF INWARD LOOKING POLICIES: PROTECTION OF INFANT INDUSTRIES: In%ard policies uses import substitution to protect infant industries from foreign competition so that large NC6s don6t run them out of business and they have a fair chance to gro% and develop themselves. This means higher "N# %ithin the country as more revenue %ill be generated by the domestic products.
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SHEILDS ECONOMY FROM EXTERNAL SHOCKS: It acts as a buffer and shields the economy from e9ternal forces. *ence the country is less volatile to%ards outside recessions and booms$ resulting in stable and sustainable gro%th.
REDUCES BALANCE BA LANCE OF PA PAYMENT YMENT DEFICIT: The in%ard policies increase tariffs and :uotas :u otas restricting imports or making it more e9pensive for people to buy. *ence they rely more on locally produced goods rather than foreign goods. This improves the 'O# deficit. The local production gets more competitive and the surplus can be e9ported further improving the 'O# of the country.
BUILDS A BASE FOR FUTURE: 'arriers %ill stay as they are until local firms are able to compete in terms of si&e ; have ac:uired the kno%
DISADVAT DISADVA TAGES OF INWARD I NWARD LOOKING POLICIES INEFFICIENT RESOURCE ALLOCATION: The in%ard policies lead to inefficient resource allocation %hich results in %elfare loss %ithin the econom economy y. This is because because the goods goods and servic services es availa available ble in the %orld %orld market market are cheaper still the people are forced to buy them at a higher price from the domestic market or bare the cost of tariffs imposed.
OPPORUTUNITY COST OF SUBSIDIES: The resource utili&ed utili&ed in providing subsidies subsidies to the domestic firm has high opportunity opportunity costs. These resources could6ve been used else%here such as in infrastructure$ education$ health care or to improve the standards of living.
LOW LEVEL OF FOREIGN DIRECT INVESTMENT +o% level of =DI means slo%er transfer of technology and kno%ledge %hich restricts gro%th %ithin the country. oreover there isles accumulation of capital stock %hich leads to slo%er economic gro%th.
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INCREASE INEFFICIENCY Domest Domestic ic firms firms rarel rarely y reach reach the benefit benefit of econom economies ies of scale scale by alloca allocatin ting g resour resources ces efficiently. ,lso the lack of competition and subsidies of the government results in slacking and ineffi inefficie cient nt indust industrie riess that that aren6t aren6t able able to develo develop p any compar comparati ative ve advant advantage age.. +ocal producers %ill tend to slack and %hen protections %ill be removed they %on6t be able to compete internationally and earn the same. (o they tend to remain as they are. Removal of protections is very politically unpopular and may cause resentment. Ruling government may lose its mandate
CAPITAL COST: The cost of importing capital machinery is higher due to increased tariffs and :uotas in form of protectionism. This may also result in %orsening the 'O# deficit rather than improving it. oreover the shift to capital intensive industry is done at the loss of labor intensive %hich result in unemployment
OUT,RD+OO)IN" OUT ,RD+OO)IN" TR,D/ #O+IC? #O+I C? These are the opposite of in%ard in %ard trade policies. Countries that implement it focus on international trade$ reducing protection$ lifting subsidies and increasing =DI. (ingapore$ Tai%an Tai%an and *ong )ong are successful e9amples of implementations of out%ard policies. They adopted it because of the t he limited scope from the small domestic market. They focus on e9porting more goods and services in %hich they have a comparative advantage and hence more profits can be made. It focuses on e9port promotion and developing its competitiveness in the international market. The ma!or characteristics of the out%ard policy hold0 •
Deregulation @
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=ree trade =ree floating A devaluating e9change rate *igh competiveness Increased =DI
ADVANTAGES ADVANT AGES OF OUTWARD LOOKING LOOK ING POLICIES: POLIC IES: Create emp!"me#t: any of these factories are located in urban areas ; they are labor
I#$%e#&e A''re'ate Dema#(: ,n e9port
F)#a#&)#' &ap)ta '!!(*: ,n increase in e9ports over imports can improve its terms of trade. t rade. Terms Terms of trade means ratio of e9port prices to import prices. The country need to e9port lesser to finance the same amount of imported goods e.g. machineries. ,lso there %ill be lesser danger that the economy %ill run into foreign e9change ; foreign debt problems
E+p!)t E&!#!m)e* !$ S&ae: (ince local manufacturers are producing on a large scale to %orld market$ it is able to significantly e9ploit /O(. It could be any of the combination of purchasing /O($ marketing /O($ managerial /O($ technical /O( etc. This %ill give the developing countries an advantage on top of its cheap labor labor.. It %ill be able to compete easily at international scale %ith its cost competitiveness. China is a good e9ample$ it has created a chaos in 'ritish and U( B
Lear# $r!m r),a*: 'y competing %ith multinational companies$ local firms %ill be able to improve its competitiveness. There %ill be more efforts put into R;D. arketing team %ill be more aggressive. ,lso ,lso they can learn the uni:ue features of rivals6 product ; perhaps make a large improvement over their e9isting ones to enlarge market share
DISADVAT DISADVA TAGES OF OUTWARD OU TWARD LOOKING POLICIES E#,)r!#me#ta (e'ra (e'ra(at)!#: (at)!#: Developing countries are often accused by estern economies as the ma!or contributors to global %arming$ especially China. This is true. Rich estern economies have already reached the desired level of income. ,s such living in a cleaner environment is no% their priority. ean%hile$ for poor but booming countries they have to sacrifice environment at the e9pense of economic gro%th ; development. 'esides$ industrialists in developing economies are not that %ell educated. ,s such their level of environmental a%areness is very lo%
Fa )# e+p!rt pr)&e*Fa This is assuming if all developing countries are trying to e9port their %ay out simultaneously simultaneously.. Due to flooding of manufactured goods into th e %orld market$ its prices %ill be forced to plunge$ putting e9porters in disadvantage
N! pr!te&t)!# a'a)#*t e&!#!m)& *.!&/* /9port
R)&. &!%#tr)e* ere&t pr!te&t)!#)*mIt6s unlikely that estern manufacturers are able to compete %ith lo% cost ,sian economies. anufacturing sector is labor intensive and labor form a large portion of total costs. It6s one of the ma!or arguments as to %hy ma!or estern economies are shifting their comparative advantage to services sector. Others Others %hich still have manufacturing industry as their core economic activity began to erect unfair protectionism
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