Let’s not shun imports; let’s shun protectionism, inefficiency and rent-seeking.
ISLAMABAD: In his talk with businessmen in Faisalabad last month, Adviser to Prime Minister on Commerce Abdul Razak Dawood outlined his vision for economic development in these words: “Industrialisation through import substitution coupled with export growth through diversification.”
To help achieve this vision, Dawood disclosed the intention of the government to announce a comprehensive industrial policy to shun the culture of importing everything and emphasised the need for “Made in Pakistan”. He also criticised the free trade agreements (FTAs) which Pakistan had signed with different countries by citing the rising trade deficit with China, Indonesia and Malaysia. The adviser also reminded his audience that all Asian tigers had relied on government’s support for “self-sufficiency”.
This vision emanates from an old yet common fallacy: mercantilism.
Before analysing Dawood’s statement, let me first explain a few basic points. Trade takes place between individuals and firms and not between countries. The so-called trade deficit is between two countries only notionally. Realistically, the trade deficit, or surplus, is an aggregate of trade transactions between firms in two countries. It is only a construct of macro-economics. Therefore, any discussion on the so-called trade direction should be driven by an analysis of firms.
Consider this example by my favourite professor, Christopher Lingle. In all likelihood, if you have bought any goods from Amazon, you would have paid from the money which you have earned elsewhere. However, it will be quite foolish to say that you are running a trade deficit with Amazon as you will probably never sell anything to Amazon. If it is foolish to worry about this fictional deficit between the two private parties, it is futile to worry about trade deficit between two countries. What should be discussed is the overall trade volume and its direction for a country with the world.
Let’s now think about import substitution. First of all, it is not new. Pakistan has followed this strategy since the 1960s. Import substitution entails local production to shun imports. Can we, for example, shun the import of car engines, fuel and phones and switch to producing car engines, refined fuel and mobile phones ourselves? Do we need to re-invent the wheel?
The government has continued to provide direct support for textiles in the form of concessionary loans, subsidies or tariffs. As a result of this protection, most of the textile firms have not been able to grow. On the other hand, the government has generally failed to fulfil their minimum demand – a reliable and competitive energy infrastructure.
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Ali Salman
PRIME Institute
(Emphasis added)
Source: https://tribune.com.pk/story/1892970/2-pakistan-must-push-trade-shun-protectionism/
ISLAMABAD: In his talk with businessmen in Faisalabad last month, Adviser to Prime Minister on Commerce Abdul Razak Dawood outlined his vision for economic development in these words: “Industrialisation through import substitution coupled with export growth through diversification.”
To help achieve this vision, Dawood disclosed the intention of the government to announce a comprehensive industrial policy to shun the culture of importing everything and emphasised the need for “Made in Pakistan”. He also criticised the free trade agreements (FTAs) which Pakistan had signed with different countries by citing the rising trade deficit with China, Indonesia and Malaysia. The adviser also reminded his audience that all Asian tigers had relied on government’s support for “self-sufficiency”.
This vision emanates from an old yet common fallacy: mercantilism.
Before analysing Dawood’s statement, let me first explain a few basic points. Trade takes place between individuals and firms and not between countries. The so-called trade deficit is between two countries only notionally. Realistically, the trade deficit, or surplus, is an aggregate of trade transactions between firms in two countries. It is only a construct of macro-economics. Therefore, any discussion on the so-called trade direction should be driven by an analysis of firms.
Consider this example by my favourite professor, Christopher Lingle. In all likelihood, if you have bought any goods from Amazon, you would have paid from the money which you have earned elsewhere. However, it will be quite foolish to say that you are running a trade deficit with Amazon as you will probably never sell anything to Amazon. If it is foolish to worry about this fictional deficit between the two private parties, it is futile to worry about trade deficit between two countries. What should be discussed is the overall trade volume and its direction for a country with the world.
Let’s now think about import substitution. First of all, it is not new. Pakistan has followed this strategy since the 1960s. Import substitution entails local production to shun imports. Can we, for example, shun the import of car engines, fuel and phones and switch to producing car engines, refined fuel and mobile phones ourselves? Do we need to re-invent the wheel?
The government has continued to provide direct support for textiles in the form of concessionary loans, subsidies or tariffs. As a result of this protection, most of the textile firms have not been able to grow. On the other hand, the government has generally failed to fulfil their minimum demand – a reliable and competitive energy infrastructure.
---
Ali Salman
PRIME Institute
(Emphasis added)
Source: https://tribune.com.pk/story/1892970/2-pakistan-must-push-trade-shun-protectionism/
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