Question 2
Select an emerging market economy of your choice. For this economy:
(a)Comment on its industrial structure.
Pakistan is an agricultural country and since its inception the agriculture sector of Pakistan plays a vital role by making a great contribution to the GDP. In figures, currently agriculture contributes for about 21.2 percent of GDP and accommodates 43 percent of the labour force. It is considered that Pakistan agriculture is underperforming taking performance of agricultural exports under consideration. Pakistan is dependent on climatic conditions for its exportable agricultural products may have to contend with output being determined by the vagaries of the weather. To get rid of the worst economic issues a vast amount of financial impetus is required to get the economy out of the slump.
As the industrial structure of Pakistan is very week due to economic, political and financial instability. The industries and production is significantly affected by the power shortage in the form of electricity load shedding and other power resources. Due to which industries are shutting down and production of the country is going down. In Pakistan, savings and investment remain low on one hand. On the other hand, there is poverty which is an important cause and effect of environmental degradation. According to environmental performance index (EPI), Pakistan’s rank is 120 and the Trend EPI rank is 72.
Pakistan’s environmental performance has shown little to no improvement over the last decade, as EPI rank was 123 and EPI trend rank was 72 in 2000 that shows weak performance. Similarly, GAIN index shows ranking of Pakistan as 140th with the score 48.5 and the trend is decreasing instead of improving. Vulnerability rank is 133 and readiness rank is 156. It makes Pakistan 21st most vulnerable to climate change and 56th least ready country to improve resilience. Hussain (1988) outlines some important issues regarding Pakistan’s economy which had been a hindrance in achieving economic sustainability. It is argued that the economic growth in Pakistan could not be sustained when domestic savings, export growth, debt servicing expenditure and energy export bill are performing badly. The result was budget shortfall and balance of payment deficit. Fragile economic structure, poverty, unemployment, child labour, energy crisis and environmental degradation were argued to be the hurdles in the path of sustainable development.
Because of these major challenges Pakistan has to face a major obstacle when it comes to the availability of funds and the necessary capital to push-start the economy. Many industrial development and production growth projects are incomplete of has to be started in the country and they require funds in the form of Aid, Grant or Loans from developed nations, international financial institutions and consortiums. These resources are then used to build the economic institutions and infrastructure necessary for the developmental process. Foreign Aid can thus be considered as a relocation of resources from a developed economy to a certain developing nation. Foreign Aid can either be bilateral; where there is one donor or multilateral; which include many nations. Often Aid programs are carried out via consortiums of various nations or financial institutions which get together to provide the developing nations with required financial help.
(b)Collect data for selected macro-economic indicators for this economy such as GDP, Balance of Payments, Imports/Exports, Inward/outward FDI, inflation, Unemployment, etc., for the last 10 years. What can you conclude from this data? (30%)
Key Macro-Economic Indicators of Pakistan Economy
Economic development in Pakistan has always been a slow process. The country has witnessed cyclical movements of GDP growth rates and the social sector has lagged behind. According to Human Development Index (HDI), ranking of Pakistan is 145 out of 187 countries (Human Development Report, 2011). Bad governance, lack of competitive environment and institutional shortcomings are the primary constraints on the economic growth of the country (Hyderet al. (2008)). Retrospectively, the process of deterioration of governance, institutions and economy’s structure has been an ongoing dilemma.
Pakistan witnessed a decline in investment and economic growth as well as increasing poverty. GDP growth rate and private investment declined during the decade of 1990s. The poverty and unemployment increased due to bad governance. Pakistan has faced numerous challenges since 1947.
The country inherited small industrial base, traditional and backward agriculture, lack of banking and financial institutions as well as entrepreneurship, refugee problem and poor social and economic infrastructure. In spite of all the challenges, the process of socio-economic development in Pakistan continues but with slow speed (Aslam, 2011).
A bird eye view of current socio-economic conditions of Pakistan is given in below tables and graphs.
• It is the sixth most populous country of the world with the population of 180 million.
• Rural population is greater than the urban population and 22.3% of the population lives below poverty line.
• This makes poverty alleviation one of most important objectives of the development process.
• At present the economic outlook of the country is bleak.
• GNP per capita is only $1372 and inflation rate 10.8%.
• Real GDP growth rate was 7.5% in 2004. After the world financial crisis (2008) it declined to 1.7% (2009) and now it is only 3.7% (2012).
• The public debt also increased after 2008, from 55.5 % of GDP in 2007 to 58.1% in 2009.
• It now stands at 59.4% of GDP (Pakistan Economic Survey, 2010-11, 2011-12 & 2012-13).
Years GDP Growth
2009 0.4
2010 2.6
2011 3.6
2012 3.8
2013 3.7
2014 4.1
Source: http://www.portal.euromonitor.com/portal/statistics/related
Years Gross National Income
2009 13,545,988.00
2010 15,433,243.00
2011 19,096,665.00
2012 21,082,207.00
2013 23,650,295.00
2014 26,775,661.00
Years Total GDP
2009 13,199,707.00
2010 14,866,996.00
2011 18,276,440.00
2012 20,046,500.00
2013 22,378,996.00
2014 25,068,059.00
Years Inflation Growth %
2009 13.9
2010 12.9
2011 12
2012 9.7
2013 7.7
2014 7.2
Years Trade Balance
2009 -14,164.70
2010 -16,309.10
2011 -18,623.50
2012 -19,560.40
2013 -19,548.70
2014 -23,221.60
Aid can be provided for various sectors of the economy, as it can be for the developmental purposes, or for balance of payment. Aid is also provided for military purposes when a developing nation is allied with a developed nation in a certain military expedition or a war. These economic assistance programs are considered vital to support and sustain the economic growth in the receiving country.
Moreover, they have been venerated as a source of alleviation of poverty and a source of improvement in the economic performance of the receiving country. Hence many researches have been conducted in this regard to test this theory, results of which have more or less been mixed and somewhat conflicting. Most studies have concluded that Aid either has a negative impact on the economy of the receiving nation or the effect is negligible (Boone 1996). While some have concluded that it has a positive impact, however this beneficial effect is subject to some given conditions in the receiving country (Burnside and Dollar 2000). This conflict in theory and trial is a strange but interesting phenomenon which requires a deeper scrutiny to understand it better. As the results of economic assistance programs vary from country to country, it is vital to develop a sense of understanding regarding the effects of Aid on various economic indicators and their role in determining the success or failure of the Aid program.
Years FDI Inflow
2009 190,731.60
2010 172,103.70
2011 114,401.60
2012 80,133.10
2013 135,310.20
2014 176,364.10
Pakistan being a developing country has been subject to many Aid programs, both bilateral and multilateral for supporting its economy. But it remains to be seen whether or not these Aid programs have been effective in bringing about the needed improvements in its economy.
Years FDI Inward Stocks
2009 1,441,826.30
2010 1,687,756.80
2011 1,804,543.60
2012 2,157,249.90
2013 2,546,938.70
2014 3,118,625.80
Years FDI Outflow
2009 5,792.10
2010 4,000.40
2011 5,349.10
2012 7,649.50
2013 21,519.70
2014 11,710.50
Years FDI Intensity – % of total GDP
2009 1.4
2010 1.2
2011 0.6
2012 0.4
2013 0.6
2014 0.7
In addition to financial resource constraint and insufficient infrastructure investment there are also limitations posed on economic growth because of the shortage of natural resources and destruction of environment, as was pointed out by Club of Rome many years ago (Anderson et al., 2003).
It is this particular reason that makes sustainable development one of the important topics in modern economics and it has become a goal in development strategies of many countries. Today importance is being given to environmental concerns while mapping out the policies for developing countries because of the linkage between the two. There is no universal definition of sustainable development but the widely accepted definition is by Brundtland Commission (1987) which states that it is “the development that meets the needs of present generations without compromising the ability of future generations to meet their needs.”
In other words to achieve sustainable development a country must balance its social, economic and environmental objectives or needs for future, while making decisions today. According to another definition the sustainable development means “improving the quality of human life while living within the carrying capacity of supporting ecosystems” (IUCN; UNEP; WWF, 1991).
Sustainable development means that the economic activities should not be extended farther than the level of maintenance of man-made and natural capital stock will permit (United Nations Statistical Office (1992)). The investment in social and economic infrastructure and its maintenance can bring us closer to the goal of achieving sustainable economic growth as it will increase economy’s potential for growth along with preserving the environmental resources (e.g. by building dams, roads, wind mills, developing infrastructure for the availability of safe drinking water etc).
(c) Carefully explain the major theories of international trade. Using examples from your research into Emerging Markets outline the trading patterns and using suitable data to justify your argument select a trade theory(ies) that might be applicable to your chosen markets. (70%)
International Trade Theory of Comparative Advantage
"Buy low, sell high" logic which leads to economists’ theory of comparative advantage, it is defined as comparing relative differences of price between countries, so as to clarify the structure of international trade (Amir, 2004). Such as, comparison of the present price of Sugar in the form of Wheat at homeland to the similar current price in the foreign country at a proposed balance without trade (autarky) or limited trade. The nation with the lowest available price of sugar is said to have a comparative advantage in that commodity, whereas the other nation has, proportionally, a relative benefit in Wheat (Batra and Khan, 2005). Buying at a low price and selling at a high price is the motive behind this trade which identifies a nation capability to export any specific commodity which is being produced at a bulk quantity in that country and also at a low cost (Amir, 2004).
Differences in comparative advantage among nations are described by exogenous differences in national characteristics (Riaz, 2009). Availability of Labour at low cost leads to major productivity differs in its international and different goods have different labour market needs so that the comparative advantage in manpower is one of the predictor of trade flows (Balassa, 1989). The theory of factor proportions relative factor endowment differences added to exogenous explanation of comparative advantage (Balassa, 1989). It has been found that higher capital abundant countries have more cheap manpower (Balassa, 1965), but the advantage over less abundant countries will vary with the relative capital intensity of technology (Batra and Khan, 2005). The combination of technology and differences Foundation looks good for real trade flows (Riaz, 2009) also to be considered. Trade theory also includes endogenous differences between countries. The emphasis of this theory is on economies of scale (Amir, 2004). The broader market due to trade induced a cost advantage in an industry in a country. Another theory of monopolistic competition, where the main markets are looking for trade increasing variety of products such as buyers, the special characteristics of foreign brands is based (Balassa, 1989). Trade flows in both directions differentiated products within merchandise categories (Riaz, 2009).
The international trade theory of comparative advantage is measures as Revealed comparative advantage (RCA) indexes tell us viable information for analyzing a nation’s comparative advantage, based on actual export performance. The Revealed Comparative Advantage index is from zero to one as the break-even point. If Revealed Comparative Advantage value of less than unity indicates that the commodity is not exportable, if a RCA is unity means that the commodity reflects a “revealed” comparative advantage. Revealed Comparative Advantage index is not symmetrical in a way that one can’t compare both portions of the break-even level.
Trade liberalization and free markets boost economic growth and creating employment, on the other hand, they have created fierce competition for exporters in international market, there are many organizations working globally to protect the developing countries from trade disadvantages. According to World Trade Organization‘s Agreement of Agriculture member countries should consider comparative advantage when formulating trade policies Faruqee(1995) suggested Pakistan should benefit from utilizing comparative advantage in global market to increase efficient and effective allocation of its resources.
International Trade of Pakistan:
Cotton crop is also known as “Silver Fiber” is one of the major exports of Pakistan; Pakistan’s economy depends heavily on cotton crop which significantly contributes by providing raw material to the textile industry. It accounts for 7.0 percent of value added in agriculture and 1.5 percent of GDP.
Pakistan ranks as the fourth largest cotton producing country in global ranking, satisfying almost all requirements of its growing textile industry and providing sufficient surplus for export. Pakistan has become one of the biggest exporters of cotton yarn and cotton related products (such as garments and textile made-ups) due to extra ordinary growth of local textile industry in the recent years. With the passage of time globalization is becoming inevitable. Pakistan is member of SAFTA and ECO which aims to promote zero tariffs, removal of trade barriers and promotion of intra-regional trade in the region.
Azhar (1995) If Pakistan uplifts the level of branding, storage capability and transportation to meet the global standards in international market of its non-traditional products then Pakistan can exploit its export potential. Pakistan has become one the largest exporters of yarn cotton due to government efforts and cooperation domestic growers to increase production. K. Bakhsh (2005) concluded that supervision of agencies and departments involved in the distribution and quality control of vital inputs (such as seed, fertilizer and pesticides etc) with their timely availability play the key role in cotton productivity enhancement. Waqar Akhtar (2009) calculated RCA for fruits and discovered that increasing pattern of RCA reflects higher earning s from exports which led to growth in fruits.
The pattern and nature of foreign trade gives a fairly good indication of economies that enter into trade agreements. In international trade countries with comparative advantage in certain products are likely to produce and export those commodities. In some cases, they will need to import raw materials for their exports, establishing a strong link between the two. A large number of agricultural Pakistani products exhibit comparative advantage but could not accomplish their full potential in international market. Important crops of Pakistan, such as wheat, r ice, maize, cotton and sugarcane holds 25.2 percent of the value added in overall agriculture and 5.4 percent to G DP, the major trade of Pakistan is cotton exports and with which country cotton exports exhibit strong comparative advantage. Efficient productivity in any sector reflects that the country has comparative advantage in that sector