Pakistan's Economy and Trade in the Age of Global Value Chains

• Publisher: Asian Development Bank
• Year: 2022
• ISBN:
  9789292691554
• Topic: Volkswirtschaftslehre
• Subtopic: Internationale Wirtschaftswissenschaften

This publication examines the economy and trade of Pakistan in the context of global value chains (GVCs), or cross-border production networks. The report combines innovative analytical tools with the latest available data to explore Pakistan's involvement in GVCs. It produces indicators on factors including Pakistan's rate of GVC participation, the lengths of its GVC production, its patterns of specialization, and the price competitiveness of its exports. It draws on the Multiregional Input–Output database of the Asian Development Bank, the only time series of intercountry input–output tables to date that includes Pakistan and preliminary data for 2020.

Chapter 1

INTRODUCTION

This statistical report examines the economy and trade of Pakistan in the context of global value chains (GVCs), a form of fragmented production that has affected everything from automobiles to vaccines. GVCs pose a unique analytical challenge since conventional trade statistics implicitly bundle together value added of different origins. Thus, exports of country A to country B may contain contributions from countries C, D, and E—relationships that would generally be hidden. This report disentangles and analyzes such relationships. It combines innovative analytical tools with the latest available data to produce indicators that describe Pakistan’s rate of GVC participation, the lengths of its GVC production, its patterns of specialization, and the price competitiveness of its exports—among many others. The key data source of this report is the Multiregional Input–Output (MRIO) database of the Asian Development Bank (ADB), the only time series of intercountry input–output tables to date that not only includes Pakistan but also has (preliminary) data for 2020. Box 1 provides more information on this dataset. It is hoped that the insights this report presents will prove useful for policymakers and the general public.

Box 1: The Asian Development Bank Multiregional Input–Output Database

The Asian Development Bank (ADB) multiregional input–output (MRIO) database is a time series intercountry input–output tables maintained by a dedicated team in ADB. It is freely available at https://mrio.adbx.online.

Information on cross-sector linkages are provided for 62 countries and economies. A residual “rest of the world” entity is also included, allowing the table to capture the entirety of global flows.

The ADB MRIO database is an extended version of the World Input–Output Database, 2013 release. Each country or economy is divided into 35 sectors, based on Table A2 of Timmer et al. (2015). There are five final demand categories: household final consumption expenditure (FCE), nonprofit institutions serving households FCE, government FCE, gross fixed capital formation, and changes in inventories.

Officially published national supply–use tables (SUTs) and/or input–output tables (IOTs) serve as benchmarks in the construction of the ADB MRIO database. In each national SUT or IOT, sector and product classifications were harmonized to follow the 35 sectors, and whenever necessary, SUTs were transformed into IOTs following the industry technology transformation assumption discussed in the European Commission (2008).

Benchmark IOTs also serve as the base structure for producing time series of the ADB MRIO tables, using published estimates on gross output, gross value added, taxes-less-subsidies on products, imports, and exports sourced from national statistical agencies and central bank databases as control totals. The structure of imports and exports are based on bilateral trade data extracted from the United Nations COMTRADE Database and government trade and balance of payments statistics. Once the national IOTs are integrated into the MRIO database, accounts for the sectors of “rest of the world” are manually and systematically adjusted to ensure consistency with country–sector totals in the MRIO database.

The basic structure of each of MRIO table is given below. It is composed of

Z	=	a matrix of intermediates use,
Y	=	a matrix of final demand,
va	=	a vector of country-sector value added, and
x	=	a vector of output.

Read vertically, the table shows the purchases of each country-sector, distinguished between intermediate inputs and primary inputs, the latter also called value added.

Read horizontally, it shows the sales of each country-sector, distinguished between intermediate sales and final sales.

The market-clearing condition stipulates that total purchases and total sales for each country-sector must equal. This amount is total output.

A Schematic Representation of the ADB MRIO

Source: Asian Development Bank. Multiregional Input–Output Database (accessed 1 August 2021).

Sources:

European Commission. 2008. Eurostat Manual of Supply, Use and Input-Output Tables. Luxembourg: Office for Official Publications of the European Communities.

M. P. Timmer, E. Dietzenbacher, B. Los, R. Stehrer, and G. J. de Vries. 2015. An Illustrated User Guide to the World Input-Output Database: The Case of Global Automotive Production. Review of International Economics. 23 (3). pp. 575–605.

World Input-Output Database, 2013 Release.

The mountainous terrain of Pakistan has historically served as the western gate to the Indian subcontinent. Through it passed waves of migrants who contributed to the ethnic and cultural makeup of South Asia. The earliest civilization in the region—also among the earliest in the world—emerged along the Indus River Valley in the fourth millennium BCE. The Indo-Aryans came in the second millennium BCE, followed by Islam in the 11th century. The subcontinent was ruled by the British from the 19th century to 1947, after which it was partitioned into the Dominion of India and the Dominion of Pakistan, each becoming independent countries. In 1971, the latter split into present-day Pakistan and Bangladesh (Wolpert 2004; Stephens 1967). As of 2020, Pakistan has a population of 215 million, of which 44% are classified as urban.¹ It shares a border with Afghanistan, India, Iran, and the People’s Republic of China.

The rest of this report is structured as follows. Chapter 2 provides an overview of Pakistan’s economy and trade using traditional statistics. Recognizing their limitations in the context of GVCs, Chapter 3 introduces an array of indicators obtained from the literature that characterizes Pakistan’s place in international production sharing. Chapter 4 draws further insights into Pakistan’s specialization and competitiveness by refining two classic trade indicators to account for GVCs. A number of special topics are discussed in Chapter 5, including Pakistan’s membership in the South Asian Association for Regional Cooperation, its patterns of domestic agglomeration, and its economic performance under the coronavirus disease (COVID-19) pandemic of 2020. Chapter 6 concludes with recommendations for maximizing the benefits of GVCs and minimizing their risks.

Chapter 2

OVERVIEW OF ECONOMY AND TRADE

This chapter establishes some key facts about Pakistan’s economy using traditional datasets, including the gross domestic product (GDP) and its growth rate, the share of trade in GDP, and export patterns as recorded in merchandise trade statistics. These data point to an economy of middling growth, with a relatively small external sector that specializes mostly in textile products. While illuminating, these insights do not take into account intersector linkages and flows of value added, phenomena that can more suitably be studied with input–output datasets. These will be covered in Chapter 3.

Pakistan has had an uneven growth experience (ADB 2020a, 2020b; World Bank 2020a), captured in the boom–bust pattern of Figure 2.1. Though the country saw some promising growth episodes, especially during 1980–1992 when annual growth was generally at 5.0%–6.0%, its overall record has been a series of stops and starts, triggered by global events. Thus, the momentum from 2001 to 2008 was cut short by the global financial crisis in 2009, while the momentum from 2010 to 2019 was cut short by the pandemic in 2020. Indeed, the contraction in 2020 was the first for the country since 1952 (World Bank 2020a). On top of this, growth rates on average have been lackluster. After an average annual growth rate of 6.4% in the 1980s, its decade averages have since been below 5.0%, with the 2010s in particular registering an average of just 3.5%. Forecasts from the International Monetary Fund (IMF) suggest that it will remain at this pace for the near future.

Figure 2.1: Real Gross Domestic Product Growth Rate, Pakistan, 1980–2026

Notes: Years are fiscal years ending in 30 June. Forecasts are by the International Monetary Fund as of April 2021.

Source: International Monetary Fund. World Economic Outlook Database: April 2021 edition (accessed 1 August 2021).

World Bank (2020a) notes that private consumption, fueled by population growth and remittances, accounts for about 90% of growth. As demand outstrips domestic productive capacities, imports have persistently exceeded exports and have resulted in an unsustainable current account deficit. The low rate of private investment in both physical and human capital constrains Pakistan’s growth potential to just 2.5%–3.0% per year (World Bank 2020a). Because the pace of structural transformation is sluggish, many workers remain employed in low-productivity jobs in the agriculture and informal services sectors.

Slower growth rates translate to slower improvements in the standard of living. Average real incomes, as measured by constant-price GDP per capita, increased by 64% between 1980 and 2000 and by 45% between 2000 and 2020. The average Pakistani was about 1.4 times better off in 2020 than in 1980. Adjusting for differences in price levels, Pakistan has about the same living standards as Bangladesh and Cambodia, but is behind other developing countries in Asia and the Pacific like the Philippines and Viet Nam. Nevertheless, it is to Pakistan’s credit that it has managed to cut poverty from 64% in 2001 to 24% in 2015 under national poverty lines (World Bank 2020a). Sustained growth will carry such momentum forward.

One viable strategy that Pakistan can adopt to boost its growth is to further open its economy to trade. Many studies, including the paper by Frankel and Romer (1999), have affirmed that that trade more tend to grow faster. The four Asian Tigers—Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China—had famously used an export-oriented development strategy to become advanced economies by the 1990s (Stiglitz 1996), an approach that is now being followed by Viet Nam and Cambodia, among others. Benefits to economic openness include opportunities for specialization, access to wider markets, and the inflow of investments, technology, and know-how. There is also evidence that trade promotes the reallocation of labor from the informal to the formal sector (McCaig and Pavcnik 2018). An...