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Political philosophy

Impact of Globalization on Pakistans economy

Written by: Maria Sajjad

BSC (hons) Economics 2008-2012

Contents
Abstract ................................................................................................................................................... 2 Introduction ......................................................................................................................................... 3 Failed to attract foreign investment despite the fact that it liberalized its investment policies ............ 5 Trade liberalization and its Impact on growth, poverty and employment ....................................... 7 Growth ,unemployment and poverty-reduction strategy .......................................................... 10 Conclusion ..................................................................................................................... 12

Abstract

Globalization is often viewed as the pathway to economic growth and it is true of many developed countries, Pakistan like many other developing countries also made an attempt to integrate its economy with the global economy through trade liberalization but it had a negative effect on its economy. My paper is the thorough analysis of the impact of globalization on the economy of Pakistan. And answers the following questions as, why Pakistan failed to attract FDI even after liberalizing its investment policies? , How Pakistan failed in attracting foreign investment? , what was the impact of trade liberalization on Pakistan, What impact does the lowering of tariffs has on the budget (resulting in loss of revenues and a stagnant tax to GDP ratio)? , And how Globalization and trade liberalization has led to lower GDP growth, increased indebtedness, higher unemployment and higher incidence to poverty. Moreover Ill conclude by paper by giving some policies for future growth and poverty reduction strategies leading to future social progress and equitable distribution.

Introduction

Globalization is defined as the integration of the international markets, goods, services and to some extent labor. It is usually driven by a push towards the trade liberalization and the investment liberalization, whereas trade liberalization or trade openness that is one of the aspects of globalization refers to the degrees to which countries or economies permit or have trade with other countries or economies. As we see in literature, we get to know that trade liberalization always has a positive relation with the economic growth of the country. It is said that an open trade regime increase welfare and income by reallocating its recourses in the productive areas where it has a comparative advantage. It minimizes the incentive for engaging in the unproductive means of earning money that is through protectionism, lobbying, smuggling and tariff evasion. Trade liberalization has many advantages as it opens up ones economy to the global market and leads to the foreign direct investment to give boost to ones economy. But this is not always the case, globalization and trade liberalization turned out to be a curse for the many LDCs, as its the main argument of the book named Globalization and its Discontents that globalization or pro globalization has very much the potential to do wonders for the economy of a LDC if it is implemented properly keeping in view the different characteristics of the under developed countries. What the author means by this is that every country should embrace the benefits of globalization keeping into account their own history, culture, norms and traditions. Otherwise the benefits can turn into a disaster and hence globalization policies can become costly. For example, it might lead to increase instability, worsen economic conditions by exposing it to global shocks and setbacks; reduce growth, increase unemployment and finally massive rise in poverty. The problem, according to Stieglitz, is that globalization has not been

pushed carefully, or fairly. On the contrary, liberalization policies have been implemented too fast, in the wrong order, and often using inadequate or plainly wrong economic

analysis. As a consequence, he argues, we now

face terrible results, including increases

in destitution and social conflict, and generalized frustration. The culprits are the IMF and its market fundamentalists, the Washington Consensus, and the US Treasury. And here we will discuss the example of Pakistan when it liberalized its trade in 1990.Like many other developing countries, Pakistan has also opened up for trade and the foreign investment. But this openness to trade has negative implications on the economy of Pakistan, in terms of the growth, employment and living standard of the poor. Pakistan is a developing country and categorized as a third world country, whose economy is like a newly born baby, and needs to be strengthened. Pakistan took too fast to liberalize its economy. That badly affected its domestic market because of its much dependence on the imported good. Pakistan destroyed its domestic market and brought harm too its domestic market by opening up too much. Other than that due to the reduction of tariffs a lot of revenue was lost and listening to IMF for decreasing the aggregate demand or fiscal contraction rather than imposing tariffs lead to inflation, poverty and unemployment. This leads to the conclusion that Pakistan should not be opening up its trade so much, its too early for a LDC like Pakistan to make such a move given its socio-economic and political situation.

Failed to attract foreign investment despite the fact that it liberalized its investment policies

Pakistans growth rate has been impressive in the past but the investment and savings have remained low. In 70s to 80s the investment as a proportion of GDP did fluctuated, in the early

90s it increased but in 1992-1993 it was again on the declining trend that was due to the decreased investment in the public sector. Due to the declining trend in the investment rate, we see that the economic growth of the country was also decreasing due to the reduced investment, so it was possible to increase investment by attracting foreign investment. Capital and investment is what Pakistan required in order to achieve a sustained growth. In the 1980s there were some restrictions by the government on the foreign investment but in 1990s when Pakistan liberalized its investment and trade and took some measure and policies as follows to attract FDI; like the requirement for the government approval for FDI was removed, Foreign equity participation of up to hundred percent was allowed and foreign investors were allowed to purchase equity on repatriable basis, foreign investors were also allowed to negotiate the terms and conditions of the payments for royalty and the technical fee suited to then as well as acceptable to the multinationals for transferring of technology, Government also liberalized the foreign exchange regimes, Pakistan rupee has been made convertible from July 1994 and the government also give the set of incentives to investors like credit facilities and fiscal credits. Moreover the imports were also liberalized and the maximum tariffs has been removed and the large number of quantitative restrictions and barriers has also been removed, whereas in 1997 the government of Pakistan also opened up the agricultural, services and infrastructure for the foreign investment basis. Due to this investment liberalization program the initially the inflow of foreign investment grew rapidly but then after few years due to the nuclear denotation and the controversy with the IPPs (independent power projects) the foreign direct investment declined by a large figure. After doing a thorough research I came to the point that US has the largest share in FDI, followed by UK, Japan, Saudi Arabia and Germany. So after Pakistan being a nuclear power, US did not

invest much in Pakistan due to the controversy and Pakistan lost a large share resulting in reduced FDIs. It appears that despite the highly attractive incentives offered to the foreign investors, Pakistans investment in attracting foreign investment has been really poor during the last 15 years, the possible reason of this can be the political instability, the instable and unsatisfactory law and order particularly in Karachi ( the largest commercial and industrial centre) , inadequate infrastructure facilities, macroeconomic imbalances, the slowing down of economic activities and the inconsistent economic policies.

Trade liberalization and its Impact on growth, poverty and employment

Trade liberalization or trade openness that is one of the aspects of globalization refers to the degrees to which countries or economies permit or have trade with other countries or economies. Like many other developing countries, Pakistan has also opened up for trade and the foreign

investment. But this openness to trade has negative implications on the economy of Pakistan, in terms of the growth, employment and living standard of the poor. Pakistan, after independence in 1947 adopted a strategy of import substitution industrialization through over-valued exchange rate, use of quantitative controls on imports and the export taxes on principal agricultural exports: cotton and jut. In 1950s and 1960s these policies were continued and Pakistan was successful in creating a protective environment for its industrialization. It took measures in order to protect its domestic markets, high tariff and quotas were levied on the imported goods. The country had enviable growth, but it did not adequately trickle down to the poorer sections as well as regions. Oil price hike of 1973, on one hand, increased the import bill and thus worsened the balance of payments problem and on the other hand, the emergence of Middle East market and remittances contributed significantly to improving the trade balance. It faced growth and progress in the subsequent years but it liberalized its trade in 1990 with the word economy; it removed its trade barriers and was trading with the economic giants. Pakistan faced growth and progress in the subsequent years but it liberalized its trade in 1990 with the word economy; it removed its trade barriers and was trading with the economic giants. Pakistan made a bad move in liberalizing its trade too early, Pakistan is a developing country and this openness of trade posed negative consequences on the economy of Pakistan. According to the research it is investigated that Pakistan reduced its tariff below the limit committed by the WTO, that is it extent of its trade liberalization is too much. The tariff rates in Pakistan are 0-35% (excluding the automobiles), where as the rate committed with WTO is 20-50%. Pakistan opened too much to the world economy, and this openness of trade brought with it the negative implications, leading social curbs as poverty, unemployment and inflation. This can be explained in a way that as we know for a developing country like Pakistan, it is very

important for it to protect its domestic market, so for that there is the need for imposition of the trade tariffs. But when Pakistan in 1990s liberalized to trade and removed all the trade barriers to trade, the ratio of imports exceeded exports; in order to give a boost to the exports Pakistan adopted a strategy of devaluation of currency. But this strategy was did not helped Pakistan much, due to the reason that the products that are manufactured here are sub-standard and not of the quality to compete in domestic market. Pakistan Lacks a lot in the technology, innovation in comparison to its neighboring developing countries for example India. Due to the trade liberalization and removal of the trade barriers, the developed countries like US does a lot of dumping in the LDCs and the same happened in Pakistan, that led to the increased imports then the exports, even the domestic products that Pakistan produces are not competitive enough to compete with these imported products that has led to the destruction of the domestic market of Pakistan. Due to this difference between the inflow of imported products and the outflow of exported-products, Pakistan faced a negative amount in its balance of payments. So in order to correct that Pakistan has to allocate large amount of its budget because of it irrational decision of trade liberalization. As we know that the Pakistans economy is in its worst conditions and the budget deficit is 5.9% of the GDP that is too much. Large amount of the budget is allocated in the correction of the balance of payments and the debt payments due to which public spending have been reduced a lot and only 2.9% of gdp is the budget allocated on development like on human development or job creation and better standard of living of the citizens this has led to the poverty in the country and unemployment, many of the domestic markets who failed to compete with these imported goods shut-down due to which a lot of people got unemployed .Due to the trade liberalization the exchange rates and domestic interest rates increased domestic cost of production, due to this reason the growth of the large-scale enterprises remained weak and slow,

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as the industries were losing in their business that automatically lead to the lower wages of the labors and also firing of the labors in the extreme cases. After the trade liberalization Pakistan faced high fiscal deficits, adverse supply shocks due to crop failures, cost push inflation coupled with devaluation of currency and the adjustments in the utility prices. As the cost of production for the domestic markets increased likewise there was a price hike on even the basic goods lie sugar, wheat etc. Thus this led to poverty, as due to inflation the purchasing power of the poor increased and there is unemployment, so trade liberalization adversely affected the economy of Pakistan. There were also some adjustment programs associated with the liberalization but they were temporary and short lived. It is mostly thought that with the openness to trade there is economic growth that reduces poverty, unemployment and inflation. But in the case of Pakistan it had negative implications.

Growth, unemployment and poverty-reduction strategy It is mostly thought that with the openness to trade there is economic growth that reduces poverty, unemployment and inflation. But in the case of Pakistan it had negative implications. So in order to fight with these consequences that the country is facing today the following steps can be taken to counter the effects of liberalization in terms of growing incidence of poverty and unemployment;

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If we see the history of Pakistan, we see that Pakistan has experienced a phenomenal growth in the years before liberalizing its trade. It has always protected its domestic market through the impositions of tariffs and quotas on the imported goods, after liberalization the situation was reversed and Pakistan experienced an economic meltdown. This is due to the policies of IMF that Pakistan listened to and adopted of cutting down the demand or the contractionary fiscal policy rather than the imposition of tariffs to control the problems of balance of payments, inflation, poverty and unemployment. But this worsened the condition, in order to deals with these problems due to the liberalization Pakistan needs to take the following steps, 1. There should be a supply side policy and the growth should the export-led growth rather the import-led growth 2. Pakistan should invest more into the human capital, should educate its labor and produce a skilled labor that can be exported through which the country can earn foreign exchange through remittances. 3. Pakistan should protect its domestic market through the sizeable tariffs and quotas on the imported good, as the markets of Pakistan are not competitive enough to compete with the imported goods so it is too early for Pakistan to liberalize its economy. 4. Pakistan should work on making its domestic markets more competitive. 5. Oil and fertilizers are one of the most expensive goods that Pakistan imports, so it need to allocate budget on the development and exploration of the oil fields, moreover it should allocate budget on the innovation and technology through which it can make the substitutes to the imported fertilizers.

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6. Pakistan needs to revive its industrial units that were shut down and should encourage its small and medium term enterprises for the sustained growth, reduced unemployment and poverty. 7. Political stability and the continuity of the policies is also important.

Conclusion Given the socio-economic and political situation of Pakistan, it should not liberalize its economy too much. Pakistan need to take the above given recommendations in order to get out of the problems brought up by trade liberalization. It needs to protect its domestic markets first and reduce its reliance and dependence on the foreign products. Pakistan has a huge fiscal deficit and the balance of payments is in negative that portrays the bad situation of our economy. There are double digit inflation, poverty and high unemployment rates. Pakistan needs to tackle with these due to trade liberalization of its economy to have sustained growth and for that it needs to take measures.

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