Lending Rates and Export Refinance Scheme: The real interest rates after declining from 9.5 percent in 2000-01 to -0.3 percent in 2004-05, increased to 3 percent in 2005-06. Similarly, the rate of export refinance scheme from 13 percent in 2000-01 declined to 3.5 percent during 2002-04 and then increased to 9 percent in 2005-06, without prior announcement.
Although, the interest rates are now market driven but such significant movements in rates not only shake investor confidence but also influence future investment decisions.
THE FOLLOWING RECOMMENDATIONS ARE MADE IN THIS REGARD:
-- An institutional framework whereby the government is required to assure that a particular policy will remain in practice for a specific period.
-- In addition to this, the Government of Pakistan (GoP) also needs to look at the financial incentives offered by the governments of regional competitors. For example, the provision of financial support for capital investment in textile industry including second-hand machines as Technological Ungradation Fund (TUF) in India offers lower interest rates through reimbursement and subsidy on capital investment.
PRODUCTIVITY:
Productivity is the amount of output produced per unit of input used in a specified period of time. It improves when the quantity of output increases for a given amount of the quantity of inputs. Productivity is related to the concept of efficiency. Efficiency in production benefits a business and enables it to improve its productivity, which over time lowers cost and develops ability to compete and make profit.
A study World Bank (WB, 2006) points out that during 1961-05, growth in Total Factor Productivity (TFP) in Pakistan averaged 1.1 percent per year and in India 1.3 percent per year. The study also shows that growth in productivity in Pakistan declined to 1 percent during 2001- 05 compared to 2.3 percent during 1981-00 (Table 3). It states that during the 1980s, when TFP growth was high and when there was less political instability, both the microeconomic and macroeconomic dimensions of the business environment showed improvement (like macroeconomic management, regulatory environment, infrastructure, trade policy, financial sector and law and order).
Another study (Ara, 2004), also indicates a declining picture of productivity growth in Pakistan. According to this study, growth in productivity, which averaged 3.2 percent per annum during 1974-88, declined to 2 percent per annum during 1989-93 and then to 1 percent per annum during 1994-98.
However, productivity growth rose during 1999-03, but was still slow compared to that during 1974-88. The study further shows that despite the fact that growth in prices of labour and capital and that of in other raw material declined considerably during 1999-03, growth in net productivity also declined. This was so because the growth in productivity was not enough to offset the extent to which growth in input prices outpaced the growth in export prices during 1999-03.
Another study (Dollar et al, 2005), has focused on the factors regarding the efficiency of the government in providing services that are essential for creating an investment climate in Bangladesh, China, India and Pakistan. Some key results are reproduced in Table 4. The factors highlighted relate to bureaucratic control, provision of infrastructure and financial services. Compared to other countries, Pakistan's position is better in inspections per year and in financial services.
The research further illustrates that improvement in the quality of investment environment significantly affects productivity. The findings of the research indicate that productivity of Pakistan's textile firms would improve by 81 percent if quality of investment climate were to match that of China.
The above discussion suggests that a concentration on growth in productivity is vital in both the agriculture and manufacturing sectors of Pakistan.
THE FOLLOWING SPECIFIC AREAS NEED TO BE TARGETED IN THIS REGARD:
-- An increase in aggregate investment and its appropriate allocation, together with stable macroeconomic policies.
-- Adoption of updated advanced technology in units that have old technology and suffer from low technological base.
-- Improvement in management techniques and practices related to performance enhancement like alignment of resources to reflect production priorities more clearly; implementing efficient modes for quality management, quality assurance and quality control; effectiveness in placing well-defined missions, goals, and objectives; setting sophisticated strategic planning tools; and prioritising investment decisions towards outcome-oriented processes.
-- Provision of knowledge/know-how regarding capital input ie creating skill development and trained man power to appropriately operate machinery by establishing textile training institutes.
-- Controlling and then eliminating power supply interruptions/fluctuations.
-- Working conditions need to be overhauled.
-- Provision of worker social security and welfare schemes.
-- Implementation of labour laws.
-- Elimination of improper shift timings and introduction of maximum working hours.
QUALITY OF PRODUCTS:
The notion of quality of products means two things. First, good quality products are those which do not have any manufacturing fault and buyers do not make complaints about them. Second, good quality products are those which are produced by using finer or refined input material and are related to the texture of the products. For example, garments produced from finer fabrics or fabric produced from finer count yarn. At present, Pakistan needs to concentrate on both fronts.
There are two main problems that the industry is facing at the lowest end which curtail quality of the final products. The first is the poor quality of cotton largely resulting from the practice of picking cotton from the bud (which is picking cotton by hand) and from a high degree of contamination.
The second is the existence of very old (25 to 50 years) technology in the ginning process. Both these problems often destroy the delicate fibres of cotton and thus not only affect its quality but also do not allow production of cotton with higher staple length and strength, which is a prerequisite to produce finer count yarn.
The major complaint made by the European and other international buyers about Pakistani textile and clothing products is the weak and fading colours of fabrics and garments. In addition, they complain about unfinished stitching, rough and non-durable material (like buttons and zippers) used in the manufacture of readymade garments and lack of knowledge about standard measurement and sizes. Thus, the sector appears to suffer from low standard of quality throughout the output range.
It is therefore, necessary for the government to provide appropriate support and for the producers to consider and work seriously on the following areas.
-- Adopt advanced and scientific techniques at the very initial stage of cotton picking and minimise contamination in order to preserve the quality of cotton to permit producing higher counts yarns and hence finer quality of fabrics.
-- Urgently replace the old technology in ginning with advanced and sophisticated technology.
-- Create and increase awareness about the meaning of the term quality among producers and workers and why production of quality products is the key to success.
-- Identify or define quality in relation to respective markets.
-- Set up minimum quality standards for local markets.
-- Provide appropriate training to employers and employees (administrative and production workers) regarding production of quality products. This training needs to include, for example, the use of acceptable and proper raw materials as well as cutting and stitching techniques according to standard measurement and sizes.
-- Monitor quality standards (an independent monitoring authority needs to be established by the GoP having representation from all stakeholders).
-- A policy framework that moves production towards fabrics made from finer count yarn and towards value-added products made from finer fabrics. For example, to determine whether to use improved variety of seeds to produce cotton required for producing finer count yarn, as India has done by using BT-seeds, or to import finer count yarn instead of producing it locally.
INFRASTRUCTURE:
Provision of appropriate and well-organised infrastructure (roads, transportation and communications, water, electricity, gas) facilities is also a prerequisite for enhancing production.
THE FOLLOWING PROBLEMS MUST BE ADDRESSED:
-- Inappropriate warehouse capacity for storing cotton according to international quality standards (maintaining particular moisture of cotton and preventing it from contamination and from sunlight is necessary).
-- Concentration of industrial areas in mega cities (like Karachi) has increased the price of land (for both industrial and residential plots) in these cities. In order to restrict land prices, it is required to break this concentration by establishing specialised industrial zones with the provision of adequate infrastructure in the suburbs of the mega cities.
-- Shortage of water and electricity (particularly in Karachi).
-- Inadequate and poor quality of roads and transportation system, which often cause delays in the delivery of consignments.
-- Lack of a mass transit system which increases the time and cost of commuting within cities.
PRODUCT AND MARKET CONCENTRATION:
Textile and clothing exports of Pakistan are concentrated in similar items (most of which are low value-added items) and to a few markets. Pakistan's total textile and clothing exports were 65 percent of the country's total exports in 2005-06 and of the textile and clothing exports, high value-added items constituted 39 percent of the total.
This included bed sheets at 20 percent, readymade garments at 13 percent and towels at 6 percent. Similarly, of the total textiles and clothing exports, 40 percent were destined to the United States (US) market and 32 percent to the EU market in 2005-06.
Commodity concentration hurts exports by making a country more vulnerable to industry-specific shocks. If the industrial base of exports is well-diversified, then fluctuations in exports occurring due to a negative shock in a particular industry could be offset by counter fluctuations in exports of other industries. And, if exports are concentrated in low value-added items, another disadvantage is that they fetch a lower price in the international market. In the same way, if exports go to a few markets, demand shifts in some markets may not be compensated for by counter shifts in demand in other markets and thus cause instability in exports earnings.
Product and market diversification should be fostered by focusing on the following aspects.
-- Acquiring of product knowledge regarding consumer demand and choice in the new markets where Pakistan's existing exports can go.
-- Acquiring of product knowledge regarding consumer demand and choice that Pakistan can produce for the new markets.
-- Increasing production capabilities to produce more of the existing mixture of products as well as new products in order to supply to the new markets as supply to the new markets should not be at the expense of existing markets.
-- Potential near markets such as in Central Asia should be explored.
-- Learning of marketing strategies.
TABLE 3:
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Total Factor Productivity (TFP) during 1960-2003/2005
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% of Growth
in TFP
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Bangladesh 0.57
India 1.30
East Asia and Pacific 1.71
Pakistan 1.08
1981-1990 2.30
1991-2000 0.71
2001-2005 1.04
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Source: WB (2006)
TABLE 4:
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Investment Climate Indicators
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Indicators Bangladesh Chine India Pakistan
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Inspections per year (number of times) 18.6 28.1 7.9 32.7
Management time dealings with regulations (%) 4.2 7.8 14.1 10.1
Days to clear customers (imports) 11.7 7.9 9.1 17.2
Days to clear customers (export) 8.8 5.4 6.6 9.7
Power loss (% loss to sales) 3.3 2.0 8.7 5.4
Days to phone line 129.7 15.6 35.5 41.8
Have own generator (%) 71.1 27.3 61.0 42.1
Share with overdraft facility (%) 0.66 0.18 0.57 0.23
Days to clear a cheque 2.9 4.3 10.9 1.9
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Source: Dollar et al (2005)
(To be continued)