Pakistan remains among the least open economies in the world: ADB

February 14, 2022 (MLN): Pakistan can boost its growth by further opening its economy to trade as the country has one of the lowest trade-to-GDP ratios in the world, Asian Development Bank (ADB), in its report titled “Pakistan’s Economy and Trade in the Age of Global Value Chains” said.

Pakistan has historically experienced uneven growth and remains among the least open economies in the world, even after taking its relatively large size into account.

As per the report, existing patterns indicate that Pakistan’s trade is currently oriented to the United States, Europe, and the People’s Republic of China (PRC). It specializes in textiles, though some of its agricultural products are sold to the Middle East. Interestingly, it does not have a significant trading relationship with its proximate neighbours in South Asia.

While the vast majority of its export products fall under the textiles grouping, formal measures of export concentration suggest that Pakistan’s exports basket is relatively more diversified than other textiles- heavy exporters like Bangladesh and Cambodia. However, its exports are less diversified than its neighbour India.

The report noted that Pakistan has a lot of room for improvement. Using statistics from 2019 (since 2020 was an unusual year), provides a snapshot of economic
openness across various levels of GDP for 166 countries and economies with available data. The data shows that at just 30%, Pakistan exhibits one of the lowest trade-to-GDP ratios in the world, measured as the sum of exports and imports divided by GDP. The country is less open than neighbours India (39%) and Bangladesh (37%).

Among the sample, it is only more open than Ethiopia, Brazil, and Sudan. While its present ratio is higher than the 15%–20% it registered in the 1960s–1970s, it is down from the peaks it saw in the 1990s when it reached 38%.

Being a relatively larger country, Pakistan’s trade openness remains remarkably low. For example, countries that have GDPs comparable to that of Pakistan but with much higher trade-to-GDP include the Philippines (69%), the Netherlands (156%), and Viet Nam (210%). India’s GDP is almost 10 times larger than Pakistan’s, yet trade plays a greater role in its economy.

On the diversification front, the dominance of textile products in Pakistan’s exports raises the issue of diversification—or potentially the lack of it. Concentrating too much on only a few sectors or products poses risks to an economy since shocks to the dominant sector can more easily cause an economy-wide recession.

The low trade openness indicates Pakistan’s great potential for improvement as there are numerous benefits to economic openness, including opportunities for specialization, access to wider markets, the inflow of know-how, reallocation of labour from the informal to the formal sector and the formalization of the economy.

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