Exports and inequality

In some circles, the recent increase in exports may be a cause for celebration—exports rose to $23 billion in FY18 against $20 billion in FY17. But looking back, the country has never crossed the $20-25 billion range so any growth that is had is bordering on stagnancy. It has been a long running understanding that Pakistani exports have not diversified enough, in that they are concentrated on a select few products. But more recent analysis of global trade shows that Pakistani export basket is not ‘complex’ enough—either rare, neither technologically sophisticated, differentiated or diversified. And this lack of complexity may in a way explain the rising inequality in this country.

Using a host of international data, the Economic Complexity Index (ECI) created by MIT lab shows where countries stand in relation to one another on complexity—Pakistan ranks 91 of 126 countries, termed a ‘simple’ exporter. The index takes its inspiration from Adam Smith that “the division (specialization) of labor is the secret of the wealth of nations”. How complex an economy is would depend on the wealth of knowledge required to create the products in that economy. The index therefore uses the composition of a country’s production output.

In that sense, it makes sense why economic complexity is related to income equality. In fact, what an economy produces, or its productive structures can be used as a proxy for the level of social capital and the health of its institutions as well. Authors of a related study argue that there is a strong correlation between an economy’s ability to both generate and distribute income and the mix of products the economy is able to produce and export. And as economic complexity grows, income inequality comes down.

This simple analysis challenges the concept of redistributive policies in reducing inequality. The author of the study Cesar A. Hidalgo explains: “If you’re a country like Venezuela, no matter how much money Chavez or Maduro gives out, you’re not going to be able to reduce inequality, because, all the money is coming in from one industry, and the 30,000 people involved in that industry are going to have an advantage in the economy. While if you’re in a country like Germany or Switzerland, where the economy is very diversified, and there are many people who are generating money in many different industries, firms are going to be under much more pressure to be more inclusive and redistributive.”

It seems clear why Pakistan ranks low. There is very little knowledge expertise, or technological suave that goes into growing common crops and exporting low value added products with a high concentration on select sectors like textile. If production was more spread out across products and industries, using a wide knowledge base, it would mean incomes earned are across many more sectors and industries and money is less concentrated.

Perhaps only a cursory look at poverty and inequality numbers would show that while poverty levels, overall, have come down, inequality across the country has increased. According to Oxfam’s Reducing Inequality (CRI) Index, Pakistan ranks 5 of 8 countries in South Asia, with India, Nepal, and Sri Lanka all more equal than Pakistan.

Evidently, government incentives, and tax breaks for a select few have not worked to boost exports simply because they are entirely unfocused and un-strategic. There is a lot more investment (in terms of money, innovative technology, techniques and expertise) that needs to come in sectors where we could create value-added, unique products. Entering GVCs starting from the bottom and moving up the value chain through reinvestments and strategically negotiating FTAs are on the top. CPEC and TIR conventions can help in the trade facilitation part to a degree; but all else needs to come through the combined efforts of public and private sectors.