Implications for Pakistan of abolishing textile and clothing export quotas: summary of the World Bank Study

The study provides an analysis of potential gains and losses for Pakistan, from abolishing the quota system built up under the MFA, which will be dismantled under the ATC in January 2005.
The study shows that whether Pakistan will be better or worse off depends, inter-alia, on the extent to which exports from Pakistan are restricted relative to exports from other suppliers; the strength of the competitive relationship between suppliers; and the extent of complementarities associated with global production sharing, particularly the benefits from increased demand for textiles and clothing as inputs.
Overall the short run impact of MFA abolition will be positive on the Textile sector, negative on clothing.
The analysis suggests that Pakistan will benefit substantially from abolition of its own quotas, with the benefits resulting from improved efficiency of resource allocation outweighing the loss of quota rents.
However, given that the quotas on all others exporters will be eliminated at the same time, the picture is less clear-cut.
Pakistan can be confident of experiencing a significant increase in textile output and exports, but may suffer a significant fall in output and exports of clothing, as a result of stronger competition from countries with higher productivity in this sector.
The implications for the apparel sector could be serious if no action is taken to improve productivity - output could decline by over 15%, and exports by a quarter.
The adverse impact of increased competition will be softened by the diversity of the industry, with many of the products in which Pakistan specialises, such as men's knit shirts, being much less important to competing countries.
While this diversity will help reduce the adverse impact of quota abolition on clothing, it does not appear to be sufficient to eliminate them - many important products for Pakistan, such as sweaters, are important to other exporters and face tight quota restrictions.
Overall, Pakistan's real income would decline by perhaps 0.4%, and real wages could decline slightly if no actions are taken to improve productivity.
After abolition of the quotas, markets will become much more responsive - increasing the opportunities to expand when productivity rises. By contrast, countries that lose competitiveness can expect to suffer larger losses in market share.
Thus, raising productivity, either by improving the efficiency of the production process or the range and the quality of the products produced, is key to reaping the benefits from abolition of the MFA.
Analysis of the cost structure of the textile and garment firms indicates that materials account for the majority of costs so that efficiencies in purchasing and use of material would likely be necessary. If, for example, Pakistan were able to increase its productivity level in textiles and clothing by around 60%, to reach China's productivity levels, the welfare gain would likely be over $1 billion per year.
Further gains would be achievable by improving the quality of the products exported, and the prices received.
Given that wages in both textile and garment sectors in Pakistan are currently very low by international standards, improvements in productivity could lead to significant increases in output, employment and exports of these goods.
The study suggests the need to take immediate actions to increase the productivity of the textile and clothing sector.
An improvement in the overall investment climate - the provision and cost of infrastructures and power, the situation of law and order, the regulatory burden and rationalisation of the tariff regime - would benefit the economy at large as well as the textile and garment sector.
This should be accompanied by industry specific actions, to tackle issues such as the slow process of obtaining refunds, delays in clearing customs, and the shortage of skilled workers.
In both sectors it will also be important to improve the quality of management and training. Broader economy wide improvements in the investment climate will have enormous payoffs, not just by strengthening the sector, but by helping Pakistan diversify into other products where competition will be reduced, as other countries transfer resources into textiles and clothing following quota abolition.
As long as the responses of policy makers and the industry are sufficiently rapid and the demise of quotas is complete, the end of quotas will bring important long-term gains to Pakistan.
Producers who succeed in a particular product line will no longer need to compete for limited quotas, or fear the introduction of new "safeguards". Efficiency and product quality can be expected to increase, with important dynamic benefits for the economy and particularly for employment and income levels.