January 8, 2020 (MLN): Global Value Chains (GVCs) are not only helping multinationals to reduce their costs and improve the quality of their products, they are also enabling the contributing countries to integrate into global markets.
Unfortunately, Pakistan stands among those economies that could not realize maximum benefits of integrating into GVCs across different sectors, as Pakistan has been unable to establish a presence in the global production and supply networks just like Vietnam and Bangladesh did, reveals a special section in the SBP’s first quarterly report for FY20.
However, as per the report, many key developments pertaining to GVCs are currently underway which Pakistan can utilize to deepen the linkage of its manufacturing activities with the global value chains to steer its exports towards a sustainable growth trajectory similar to Bangladesh’s performance in the textile sector which provide the country with an opportunity to realign its trade activities and improve integration within the existing and emerging global value chains.
For instance, manufacturing activities around the world are becoming more services-oriented. Trade flows in value-added terms reveal that transport logistics, communication, and financial services play important roles in GVCs. Secondly, information technologies are undergoing a revolutionary transformation. Businesses and consumers alike are transitioning from the usage of social media, analytics, and cloud computing to areas such as distributed ledger technology, artificial intelligence, reality augmentation, and quantum computing.
Thirdly, with consumption patterns changing and becoming more personalized, the GVCs are also undergoing a transformation, from mass production towards mass customization. This is resulting in the creation of multiple value chains for similar products, with input materials being sourced from various locations instead of relying on suppliers from a single geographical location.
Keeping in view these developments, Pakistani firms can reorient their businesses within the established chains pertaining to textiles, electronics and ICT sectors. As in the long run, the country holds the potential to target even the middle-to higher-end segments of the GVCs, given that the right mix of policies is adopted, the report underscored.
The report suggests that Pakistan has remained unable to achieve an adequate level of foreign value addition to its exports, as the domestic value-added content such as (intermediate goods that are produced locally) predominantly constitutes Pakistan’s exports. In contrast, the share of foreign value-added content to produce final goods or services to be exported, is quite small. Furthermore, during the span of 20 years (1995-2015), the share of foreign value-added in exports inched up by only 0.7percentage points.
With regards to Pakistan’s share in overall composition of GVC participation, which is the sum of backward participation (imported intermediate inputs the country used to produce exports) and forward participation (intermediate goods in Pakistan’s exports that are used as inputs in exports of other countries) in global exports, Pakistan could only increase its GVC participation by US$ 6.7 billion during 2000-15., moreover, the country exhibited the lowest rate of GVC participation as percent of exports in 2015.
The report further suggests that the share of backward participation in exports only reached 5.6% in 2015 mainly due to strong trade policy distortions in the form of tariff and non-tariff barriers on imports and low concentration of value-added products in exports.
However, in case of forward participation, Pakistan’s performance is relatively better as 27% of Pakistan’s exports are used as inputs in exports of other countries. Most of these exports originate from primary agricultural commodities and low-tech manufacturing sectors (such as cotton yarn and fabric), and are shipped to China, Bangladesh and Turkey, which produce and export value-added finished products to high-end garment stores such as Zara, Marks & Spencer and H&M.
The report further stressed that Pakistan needs to increase its presence in the network of coordinated transactions among different layers of firms on a global scale and find new avenues to increase backward participation.
Going forward, Pakistan must tap sectors, such as light engineering, appliances manufacturing and services, whose shares in GVC trade are consistently rising.
Furthermore, Pakistan needs to liberalize its trade policy to enhance its share in GVCs. In addition, designing an adequate and effective institutional framework is necessary to facilitate the growth of domestic businesses and attracting and integrating with Multi-National Enterprises (MNEs) are equally important for Pakistan to improve its footmark in GVCs.
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