Revised

TRADE AND INDUSTRIAL POLICY IN PAKISTAN: POST-URUGUAY ROUND CHALLENGES

Paper prepared for the World Bank's WTO-2000 Project

by M. Shaukat Ali*

January 2000

*Chief, Macro Planning Section, Planning Commission, Government of Pakistan, Islamabad. The views expressed in the paper are personal and do not reflect those of the organization with which the author is associated.

CONTENTS

page I. II. Introduction Brief Survey of Pakistans Trade and Industrial Regime II.A Industrialization through Import Substitution II.B Industrialization through Export Promotion: A Move Towards Trade Liberalization III. Salient Features of Pakistans Existing Regime of Trade and Industry III.A Industry III.B Trade IV. WTO-Related Domestic Issues and Required Adjustments IV.A Issues of Competitiveness IV.B TRIMs-Related Issues IV.C Required Adjustments V. WTO-Related External/Multilateral Issues and Stand Point of Developing Countries including Pakistan V.A V.B V.C VI. Conclusions References Appendix Implementation Issues Coverage Issues Specific to Singapore Conference New Issues 1 1 1

4 4 5 10 10 13 14

17 18 23 25 32 33 34

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TRADE AND INDUSTRIAL POLICY IN PAKISTAN : POST-URUGUAY ROUND CHALLENGES M. Shaukat Ali I. INTRODUCTION The enforcement of the Uruguay-Round agreements since the beginning of 1995 has posed many challenges to the developing countries. On the internal (domestic) front, these include imperatives to make adjustments in the domestic production and trade regime to stay active in the international market characterized with tough competition. On the external side, the challenges emanate from the issues related to the WTO framework itself. The issues can broadly be classified into three groups: (a) those pertaining to implementation or limitations of the already-agreed arrangements under the WTO; (b) issues of coverage specific to Singapore Conference; and (c) new issues likely to surface in the forthcoming negotiations, for coverage under the WTO framework. The objective of the paper is to identify and analyze the WTO-related challenges, internal and external, faced by Pakistan at present in the area of trade and industry. Apart from suggesting on how to cope with the internal challenges, the paper will sharply focus on what kind of strategy and course of action Pakistan, alongwith other South Asian countries, should adopt in the future multilateral negotiations to deal with the external challenges. Before analyzing the current issues, it is planned to present a brief survey of the country's past trade/industrial policy, especially the import substitution in the 60s and 70s, and gradual move towards export promotion through trade liberalization in the 80s and onwards. This will be done in section II. Section III will provide salient features of Pakistans existing trade and industrial regime. Internal imperatives of the Uruguay Round agreements alongwith suggested directions of policy would be taken up in section IV. The thrust of section V will be on identification and analysis of the external/multilateral issues both of implementation and coverage, along with suggested strategy and course of action. Conclusions are given in the last section.

II. BRIEF SURVEY OF PAKISTAN'S TRADE AND INDUSTRIAL REGIME II.A Industrialization Through Import Substitution

For more than two decades since the early 60s, Pakistan followed an import substitution strategy for industrialization. To make domestic production of importables profitable for the domestic producers, high tariffs along with quantitative controls were levied on imports, particularly in respect of consumer goods. The restrictions on capital and raw material imports were relaxed to some extent in order to support the import substitution policy.

To increase exports, Export Bonus Scheme was introduced in 1959 entitling the exporters a bonus in the form of import license equivalent to a certain percentage of the export receipts. The bonus vouchers, with higher rates for manufactures, were also saleable in open market at a premium, in some cases as high as 100 to 190% of their face value. Certain other schemes adopted for export promotion included: Export Credit Guarantee Scheme (1962); setting up of Trading Corporation of Pakistan (1967) to implement barter agreement with socialist countries; Linking Import-Licensing with Export Targets (1967); and Export Finance Scheme (1974). Import substitution did help the country in accelerating the growth rate of manufacturing sector which was recorded at 9.9% per annum during the 60s. The share of manufacturing in GDP rose to 12.5% by 1969-70. Trade composition also responded positively. Share of consumer goods in total imports which was 57% in 1959-60, fell to 16% in 1969-70, and that of capital goods and industrial raw material rose from 43% to 84% during the same period. Similarly, the share of manufactured goods in total exports rose substantially from 29% in 1959-60 to 56% in 1969-70. But in the 70s, nationalization of major industries by the government in 1972 combined with the inefficiencies created by the protective regime frustrated the process of industrial take off, as reflected by the sharp deceleration in industrial growth from 9.9% during the 60s to 5.5% during the 70s1 . II.B Industrialization Through Export Promotion: A Move Towards Trade Liberalization

The 80s witnessed a shift in emphasis of trade and industrial policy from the inward-looking import substitution to outward looking export promotion through liberalization of trade, opening of foreign exchange & payments regime, and inducing private sector to become the engine of economic growth. Three factors acted as a driving force for the shift: Pakistans own experience in the past; experience of other developing countries in trade and industry during the same period; and a serious concern over of the balance of payments vulnerability as it existed at the close of the 70s. The reform process for the shift, which started during the 80s, gathered momentum in the 90s. The thrust of the reform was to: minimize the anti-export bias; expose domestic industry to foreign competition; privatize the industries nationalized in the 70s; ease regulations on trade and industry; attract foreign investment by opening the economy; and orient the foreign exchange & payments system towards market forces. To this end, policy measures were taken in successive stages. Measures which turned out to be the turning points in the process of trade liberalization are listed below chronologically. In January 1982, a structural change was introduced in the exchange rate regime when the system of fixed exchange rate against US $ was replaced by a Managed Float system in which the exchange value of Rupee was to be determined in relation to 16 currencies of Pakistan's major trade partners. In 1983-84, a significant departure was made in the import regime when the `Positive List' system was replaced by a `Negative List' system. The system contained two lists, the banned
1

For those interested in details of why Pakistans industrialization could not take off under the import substitution regime , an analytical note is provided at the end as Appendix.

list and the restricted list. All items not appearing on either list were freely importable. Also, the number of items/categories on the Negative List were reduced gradually over time. By 1989-90, the Negative List contained only 118% import items. As part of the comprehensive tariff rationalization program introduced in June 1987, most of the quantitative restrictions on imports were converted into tariffs; the maximum tariff rate (except for automobiles) was reduced from 225% to 125%; tariff slabs were reduced from 17 to 10; and variety of sales tax across commodities was replaced by a uniform sales tax rate of 12.5%. Another turning point in trade liberaliztion occurred when requirement of obtaining import license for items on the `free list' was abolished with effect from March 1, 1991. The maximum import duty (not covering automobiles) was brought down to 70% in 199495, to 65% in 1995-96, to 45% in 1997-98, and further to 35% in 1998-99. Foreign companies were permitted to undertake export trade in 1991. Other measures on export promotion included: concessional/zero-rated tariffs for import of machinery, spares, raw materials, and other specified products needed by the export-oriented industries; duty free (i.e. no duty-no drawback) imports for exclusive manufactures of exports; and extended coverage of items under export finance scheme with duration also extended from 120 days to 160 days for exports to new markets. With a view to complement efforts on trade liberalization, reforms pertaining to foreign exchange & payments were, for the first time, announced on February 7, 1991. Both residents and non-residents Pakistanis and foreigners were allowed to open foreign currency accounts in domestic or foreign banks, to be fed by cash, traveler cheques, or proceeds from remittances. Article-VIII Convertibility of exchange rate was effected in 1994-95, making Rupee fully convertible for all investment and debt related transactions, barring trade account which remained out of convertibility provision. On 19th May 1999, the managed float exchange rate, operative since 1982, was converted into a market-determined inter-bank floating rate (FIBR), with currency convertibility extended to even trade account.

The reforms combined with political stability in the 80s did pay a dividend. Value added in manufacturing sector during the 80s grew by over 8% per annum in real terms compared to only 5.5% during the 70s. Overall exports in real terms grew by 9% per annum touching the level of $ 4.9 billion by 1989-90. The growth in exports of manufactured goods was relatively faster (11%) indicating a GDP elasticity of 1.34. This was despite the recession in the world economy and growing protection in the developed countries especially under the Multi- Fibre Arrangement (MFA) for textiles. The share of manufactured exports in total rose to 53% in 1988 compared to 38% in 1978. However, industrial growth as well as trade performance remained depressed in the 90s partly on account of political instability caused by the frequent changes of governments, and partly because of adverse transitional impact of the intensive structural adjustment program put in place since 1988 onwards.

III. SALIENT FEATURES OF PAKISTANS EXISTING REGIME OF TRADE AND INDUSTRY Consequent upon the series of reform introduced in the 80s and 90s, Pakistan's trade and industrial regime at present features the following. III.A: Industry 1. Manufacturing sector presently contributes 18% to GDP, 10% to employed labor force, though its share in exports stands at 87%. Having recorded an over 8% growth during the 80s, the sector slowed down somewhat in the 90s. During 1991-99, its average annual growth amounted to 5.3%, with that of large scale manufacturing at only 3.9%. A list of major industrial items along with their present level of production is given in table 1. Table 1 INDUSTRIAL PRODUCTION (1998-99) Item Unit Production --------------------------------------------------------------------------------Cotton yarn mln kg 1535 Cotton cloth (mill sector) mln sqr mtr 378 Vegetable ghee/cooking oil 000 tonnes 826 Sugar Fertilizer (Urea) Paper & paper board " " " 3551 3522 355

Motor tyres 000 Nos 767 Lcv/car/vehicle " 47 Bicycle " 504 Tractor " 26.6 Electric motor " 33.6 Transformer " 14.6 Cigarettes mln nos. 51668 Petroleum products mln ltr 7600 ----------------------------------------------------------------------------Source: mainly from Pakistan (1999).

2. Under the present industrial policy, no prior permission is needed for setting up an industry. Industries have been prioritized under four categories: A. Value added and exports industries; B. Hi-Tech industries; C. Priority industries; and D. Agro-based industries.

Non-competing imports of plants, machinery and equipment (PME) carry zero tariff and zero sales tax for categories A and B, and minimum tariff (i.e. 10%) with no sales tax for category C and D. 3. Foreign investors enjoy an attractive package of incentives for setting up manufacturing projects in Pakistan. Foreign equity equal to 100% is permissible. There is no compulsion for them to go public. Ceilings on payment of royalties and technical fees have been removed. Work permit restrictions on expatriate managers have been withdrawn. Foreign investment is granted depreciation allowance up to 90-100%. Foreign companies are permitted since 1991 to undertake export trade. All foreign exchange controls have been abolished. The foreign investors are permitted to bring capital, issue shares, remit dividends or interest, and transfer capital and profit out of Pakistan without restrictions. According to the ADB (1999), Pakistans index of openness to FDI is 2.0 compared to 3.0 for whole South Asia and 2.4 for South East Asia [lower score means more open]. 4. Privatization of the nationalized industrial units started in the late 80s. About 118 units were identified for privatization, with additional 6 added to the list later on. So far, 90 units have been privatized and handed over to the private sector. Others are in the process.

III. B: Trade 1. Measured in terms of 'trade as a proportion to GDP', the degree of openness of Pakistan's economy is still limited. The proportion for 1996-97 was 33% (exports 13.5% and imports 19.3%). For 1997-98, it further went down to 30% primarily because of reduced imports. 2. Inadequacy of exports to finance imports is one of the several weaknesses of export regime in Pakistan. During 1991-98, export receipts have financed, on average, 76% of merchandise imports. This is due partly to low absolute level of exports and partly to its low growth rate. The export level at present (1997-98) is $8628 million compared to the import level of $10118 million. The average growth rate of exports during 1991-98 was recorded at 7.2% per annum in current dollar terms (in real terms it was 5.6%). 2. The second weakness of the export regime pertains to diversification. Though manufactured exports constitute 87% of total exports, 57 points of this is cotton-based manufactures, making exports vulnerable to cotton crop and textile industry (Table 2).

Table 2 MAJOR INDUSTRIAL EXPORTS (1997-98) --------------------------------------------------------------------------------------Item (Mln $)% of total exports --------------------------------------------------------------------------------------Total exports 8628 100.0 Industrial exports 7532 87.3 Of which: Cotton-based manufactures 4939 57.2 Cotton yarn 1160 13.4 Cotton cloth 1250 14.5 Ready-made garments 747 8.7 Made-up articles 755 8.8 Hosiery 697 8.1 All others 330 3.8 Other traditional 827 9.6 Synthetic textiles 618 7.2 Carpets/rugs 209 2.4 Non-traditional 1766 20.5 Leather manufactures 372 4.3 Sports goods 384 4.5 Surgical goods 125 1.4 All others 885 10.3 --------------------------------------------------------------------------------Source: Pakistan (1998). 4. Apart from the commodity concentration, there equally exists a geographical concentration in Pakistan's exports. Almost 2/3rd of exports are directed to only 11 countries (table 3). This points to another element of export vulnerability. Table 3 GEOGRAPHICAL CONCENTRATION OF EXPORTS (1997-98) --------------------------------------------------------------------------------------Country Share in Exports Country Share in Exports (%) (%) -------------------------------------------------------------------------------------USA 20.5 France 2.9 Hong Kong 7.1 Belgium 2.7 UK 6.9 Italy 2.7 Germany 6.3 Saudi Arabia 2.5 Dubai 5.0 South Korea 2.0 Japan 4.2 Netherlands 3.2 Total 11 countries 66.0 -----------------------------------------------------------------------------------Source: Pakistan (1998).

5. Pakistan at present maintains a fairly liberal trade regime. There is no Positive List of imports; but only a Negative List that too contains a few items [70, as per 1999-2000 Trade Policy] justified on social, religious, international conventions, and security grounds. It is to be pointed out that some items (66 in number) are importable after fulfilling certain procedural/health/safety requirements. All other quantitative restrictions on imports have been either removed or converted into tariffs, enhancing thereby the transparency in the import regime. At the same time, there are neither minimum import prices nor specific safeguard measures applicable to imports. The tariff regime stands rationalized in that: (i) there are no para-tariffs or surcharges but only an all-inclusive tariff; (ii) since March 1999, the maximum tariff has been reduced to 35% (barring cars); (iii) there are only four slabs of non-zero tariffs cascaded as 10% for imports of raw material, 15% for chemical and compounds, 25% for intermediate goods, and 35% for final products 2 ; and (iv) there is a uniform rate of sales tax on imports of 15%. The factors behind these adjustments combine the imperatives arising from three sources: governments own program of trade liberalization; the IMFWorld Bank supported structural adjustment program; and the WTO. 6. Tariff structure on cars/automobiles has been kept above the rest of the imports, largely to attract and provide protection to foreign investors in this sector. It is no surprise that as on today Pakistan is the host of many of the famous car manufacturing multinationals including Suzuki, Toyota, Nissan, and Mitsubishi. The tariff structure has usually been ad-valorem except between March 1999 to 15 December 1999, when, in order to augment foreign exchange earnings, an all-inclusive import duty was levied of $5000 for cars of 800cc, $10000 for 8011000cc, $15000 for 1001-1300cc, $20000 for 1301-1600cc, and so on. On December 1999, the system of ad-valorem tariff was restored with the following rates: 100% for cars upto 1000cc; 120% for cars between 1000 to 1300cc; 150% for cars between 1300 to 1800cc; and 225% for cars above 1800cc. 7. Export of all goods is allowed from Pakistan except banned items which have been reduced to only twelve, namely, wheat, sann hemp, intoxicants, wild animals, charcoal and firewood, wood and timber, fissionable material, anti personnel landmines, antiques, edible oil (except in bottle or other consumer packs), poppy seeds, and chemicals (except to states which have ratified the Chemical Weapons Convention). Export of petroleum and petroleum products is allowed through public sector agency only. Except this, there is no state trading in any other manufactured exports. 3 Food-related exports are subject to quality control under the Agricultural Product (Grading and
Cascading theoretically implies encouraging domestic production of priority industries, otherwise tariff policy becomes only a tool for raising government revenues. As long as WTO commitments regarding tariff binding and tariff reduction are fully complied with, cascading is not conflicting with WTO rules. Even in agriculture exports, state trading has been minimized with the abolishing of the Cotton Export Corporation and Rice Export Corporation, the two agencies exclusively mandated for export of cotton and rice in the 80s. In case the Trading Corporation of Pakistan (TCP) undertakes some trade, it does not enjoy any special or exclusive trade privilege vis--vis the private sector. As such its operation does not fall under GATT Article XVII relating to state trading.
3 2

Marketing) Act 1937. There is hardly any export duty or export subsidy at present. This resulted from meeting conditionality requirements from IMF and World Bank. 8. Along with trade regime, foreign exchange and payments regime equally stands fully liberalized. Since May 1999, the country is on a market determined inter-bank exchange rate system with full currency convertibility on current account. The elimination of quantitative restrictions and rationalization of trade tariffs, as mentioned in the preceding paragraphs, resulted in lowering the average rate of import and export duty as well as the anti-export bias implicit in trade regime which has gone down from 36% in 1997 to 17% in 1998, as reflected in table 4 . Table 4 AVERAGE IMPORT-EXPORT DUTY AND ANTI EXPORT BIAS --------------------------------------------------------------------------------------------------Year Average Duty Effective Exchange Antia b Imports Exports Rate (Rs/US$) Export Imports Exports Bias c --------------------------------------------------------------------------------------------------1987 35.8 0.43 23.33 17.10 1.36 1988 30.9 4.20 23.03 16.86 1.37 1989 28.0 5.01 24.60 18.25 1.35 1990 29.4 4.59 27.75 20.46 1.36 1991 1992 1993 1994 27.2 24.9 23.5 24.6 2.97 2.74 0.49 0.40 28.52 31.02 32.05 37.57 21.76 24.16 25.83 30.04 1.31 1.28 1.24 1.25

1995 24.2 0.01 38.32 30.85 1.24 1996 22.4 0.02 41.10 33.56 1.22 1997 18.6 0.01 46.24 39.0 1.19 1998 17.0 0.00 50.56 43.19 1.17 --------------------------------------------------------------------------------------------------a

Import duty collected as % of total value of imports. Export duty collected as % of total value of exports.

Measured by the ratio of effective exchange rate for imports ($ imports converted into rupees at official exchange rate plus import duty, divided by $ imports) to effective exchange rate for exports ($ exports converted into rupees at official exchange rate minus export duty, divided by $ exports). The extent by which this ratio exceeds 1 determines the magnitude of implicit bias against exports. Pakistan Source: Computed from data given in (1997), (1998) and (1999).

Viewed in terms effective protection to industrial sector, the tariff rationalization has been instrumental in improving both the level and the composition of industrial protection. There was a significant decline in the effective protection rates (EPRs) on consumer goods while the EPRs remained at moderate level on intermediate and capital goods. Table 5 IMPLICIT EFFECTIVE PROTECTION RATE Average EPRs (%) Industry 1963/64 1980-81 1990-91 ---------------------------------------------------------------------------------------------Consumer goods 883 28 43 Intermediate goods 88 376 93 Capital goods 155 69 89 Overall 271 60 77 ----------------------------------------------------------------------------------------------Source: For 1963-64, Lewis and Guisinger (1965); For 1980-81, Naqvi and Kemal (1983); and For 1990-91, Kemal et al (1994). For more recent years, though no study on effective protection is available, it is understandable that the EPRs have gone further down owing to the significant reduction in tariffs during the 90s---the maximum tariff and average tariff on imports which were 92% and 29.2% in 1990 are now 35% and 17% respectively. It is also noteworthy that the applied tariffs in Pakistan are well below the bound tariffs under WTO. As per Schedule XV of WTO, Pakistan's offer on tariff reduction under the Uruguay Round of trade negotiations covered 2128 items (roughly one-third of the national tariff schedule), comprising: 700 items in agriculture, 493 in textile & clothing, and 935 in industrial goods. The general level of binding was between 20% to 50% except in agriculture where for most of the items it was 100% and for a few 150%. In textiles, the bindings were mostly between 3050% with yarn carrying 10-15% rates. At present, according to the applied tariff schedule, the tariff rates range between 0- 35%. This means that the actual extent by which market access has been granted is more than what was committed.

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IV.

WTO-RELATED DOMESTIC ISSUES AND REQUIRED ADJUSTMENTS

Two of the implications of the WTO-based trade order, for domestic industry and trade are worth noting. a) The universal reduction in tariffs on trade in industrial goods combined with removal of non-tariff barriers means a reduction in protection to domestic industry on the one hand and a greater competition in export market on the other hand. Competition-related implications are further aggravated by the elimination of export subsidies.4 The TRIMs provisions disallow conditions countries impose on investment especially on foreign investment, to mould investment in accordance with the national priorities. These include: local content requirements (like Pakistans deletion program); trade and foreign exchange balancing requirements; and domestic sales (or export) requirements. The conditions have been prohibited on the plea that these have adverse impact on trade.

b)

Both the implications call for a restructuring of the countrys industrial and trade sector with the objective to live with smaller protection and still remain competitive in export market. IV. A Issues of Competitiveness Theoretically, competitiveness is a composite of cost effectiveness and high quality/standards. Cost effectiveness is influenced by three factors: Improvement in factor productivity (+ effect); Level of protection (+ effect); Real devaluation (+ effect).

Factor Productivity: Incidently, the productivity trends observed in the manufacturing sector in Pakistan in the past fail to show much improvement. Barring improvement in selected industrial activities, the productivity index in the large scale manufacturing on the whole shows an increase of only 2.4% during 1981 to 1997. Table 6 INDEX OF PRODUCTIVITY (Large Scale Manufacturing) --------------------------------------------1981 100.0 1993 103.0 1997 102.4 -------------------------------------------Source: Pakistan (1997a).
4

Pakistan, being a country with less than $1000 per capita, is exempt from the rule prohibiting export subsidies.

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Protection Level: The tariff rationalization and withdrawal of export duties on domestically produced inputs, effected in the 80s and 90s, have eroded the incentives for the marginal firms. The withdrawal of export duty on cotton raised its domestic price making thereby the processing of cotton yarn unprofitable for marginal producers. Similarly, reduction in tariffs resulted in lower level of profitability in some industries. About 3500 industrial units, which are sick at present, is partly a reflection of this fact. Real Devaluation: In the absence of gains in productivity combined with reduced protection, the competitiveness primarily becomes a matter of race between inflation and exchange rate. In the past, devaluation policy was pursued rather half-heartedly, as evidenced by the following three factors: Firstly, except rarely, it was never meant to give an up-front edge to exporters. Mostly, it was meant to compensate for the inflation already taken place. even the compensation was most of the time partial. This was designed to arrest the escalation in interest payments on foreign debt which devaluation always brings about. since devaluation, by raising the cost of imports, is inflationary in its impact, it succeeds only if it is followed by a tight monetary policy. This principle was not given due consideration.

Secondly,

Thirdly,

As a result, the devaluation in real terms turned out to be either small or even negative in certain years. Table 7 reveals that real (purchasing power parity adjusted) devaluation during 1992-99 against US $ has been 22.6% compared to the nominal devaluation of 55.2%. If exchange rate index is computed against the currencies of 11 major trade partners, the real devaluation works out to be negligible. This means that the exporters were unable to pass on a reasonable proportion of the devaluation benefits, to importers in the form of reduced dollar prices of their exports. It has been found that for every 10% nominal devaluation, export prices were reduced only by 1% 5 . Such a low elasticity explains why devaluation failed to promote exports.

Esimated from a regression equation, using data from 1981-1999, which yielded: Log UVIX$ = 4.88 - 0.10 Log ERII (24.6) (-2.0) where: UVIX$ = unit value index of exports in dollar terms. ERII = Index of exchange rate (Rs/$) inverse. Figures in parentheses are t-ratios.

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Table 7 REAL DEVALUATION OF PAK RUPEE (Minus sign means appreciation) (%) -----------------------------------------------------------------------------------Fiscal Nominal PPP PPP Adjusted REERI** Year Devaluation Index* Devaluation (against 11 against $ against $ currencies) -----------------------------------------------------------------------------------91 1.00 100.0 92 9.8 0.94 4.2 93 4.3 0.88 -2.0 94 13.9 0.82 7.0 101.8 95 2.2 0.74 -7.8 103.8 96 8.1 0.69 1.0 100.2 97 13.9 0.63 6.5 100.6 98 9.7 0.60 5.0 100.5 99 13.7 0.58 10.1 91.8@ -----------------------------------------------------------------------------------Total (92-99) 55.2 22.6 -----------------------------------------------------------------------------------* Purchasing power parity index reflecting the ratio of consumer price index of the US relative to Pakistan. ** Real Effective Exchange Rate Index, reflecting PPP adjusted exchange rate of Pakistani Rupee vis--vis currencies of its 11 major trade partners. @ For first two quarters only. Source: Computed from data given in Pakistan (1999) and IMF (1999). The last column is taken from World Bank (1999). Quality/Standards : Quality control is integral to competitiveness. Low quality of the product makes it to fetch low price in the international market. The obvious problems of quality in Pakistan are those of technical precision, grading, and standardization. 6 . The basic factor behind these problems is the lack of conformity assessment infrastructure (MTSQ---metrology, standardization, testing, and quality). The two existing organizations in this area, namely, Pakistan Standard & Quality Control Authority (PSQCA) and National Accreditation Council (NAC) seem to have very limited activities largely confined to national standards. Similarly, there are hardly any testing laboratories that are internationally recognized. The existing very low number of industrial firms having ISO-9000 Certification is a glaring reflection of these problems, which in turn are limiting the ability of local firms to penetrate in major export markets such as EU, USA, and Japan.

IV.B TRIMs-Related Issues

6

It has been observed that a Pakistani cotton shirt sold at European stores fetches price that is about 30-60% of those manufactured in Malaysia, Taiwan, or Hong Kong.

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The indigenization and deletion programs, meant to encourage assembly-cummanufacturing, are always integral part of the strategy for developing local industry especially in engineering and automobile sectors. Governments provide incentives to assembly through lower (than commercial) import tariffs on components if the producers agree to use gradually an increasing proportion of domestically produced components. It is a means to induce foreign investors especially multinationals to go beyond assembly of imported ckd packs, and ensure that their industrial activity establishes some back-ward linkages in the form of a specified proportion of components either domestically produced or purchased from domestic vendors. In the absence of this, the host country will become only a rent-seeking place for the foreign investors to come and reap the benefits of cheap labor by employing it in industrial activities limited to assembly only. Though on the basis of pure economic theory it can be proven that such a program involves economic costs to consumers, government budgets, and to the economy in general, yet, perhaps from the political economy point of view, application of such programs has been common in many developing and even in the developed countries. For example, in UK, if value addition falls short of 85%, the firm is denied the localization benefits and its imports are placed at par with commercial imports subject to higher (commercial) rates of duties. The programs have equally been operative in Australia, Mexico, Brazil, Argentina, Philippines, India and Pakistan. As mentioned in section III-A.2 and 3, Pakistan at present maintains a substantially liberal investment policy. At the same time, since 1987, it has deletion program in the three major industries including automobile, electronics, and machinery. 7 Under TRIMs Agreement, the indigenization restrictions especially on foreign investment will have to be phased out by January 1, 2000. In accordance with Article 5.1 of the TRIMs Agreement, Pakistan notified to the Council of Trade in Goods of the existing TRIMs not in conformity with the provisions of the Agreement within the stipulated period. The notification included its indigenization policy. The question now is how the issue of indigenization be handled.

IV.C REQUIRED ADJUSTMENTS The issues of competitiveness and TRIMs as reported above reflect the extent of difficulties
Under the deletion policy, an industrial enterprise is offered an option for the deletion defined in terms of increase in the use of domestically produced components and parts. The policy is open to foreign as well as domestic enterprises. There is no compulsion for an enterprise to accept the deletion program. In case, the enterprise agrees, a time frame for deletion is worked out in consultation with the enterprise and the local vendor industry responsible for supplying the requisite components and parts. In exchange, the enterprise is entitled to a facility to import prescribed components and parts needed in the assembly and manufacture of specified items, at concessionary rates of tariffs. The enterprises outside the deletion arrangement have to pay the normal tariff rate. The fact that the deletion policy is optional and carries in exchange a facility of concessionary (reduced) tariffs, plus the fact that the Pakistans deletion policy has a built-in mechanism for gradually phasing out these tariff concessions over time, makes the policy less objectionable from the point of view of the provisions of TRIMs Agreement.
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in fostering the country's export-led growth program. Indicated below are the directions, both on demand and supply sides, on which the required adjustments/policies need to be focused. Supply-Side Policies i) Restructuring industrial sector towards high value added exportable industries, i.e. which are intensive in designing, technology and human skill. These may include non-conventional products in which a country like Pakistan with still low wages and ample semi-skilled labor can develop comparative advantage, like engineering goods, computer software, and handicrafts. Pakistan's engineering sector is quite large comprising around 2000 registered units with over 600000 employment and producing a wide range of goods including auto parts, electrical industrial machinery, electrical household appliances and durables, etc. According to a study, though bit old, by Kemal et al (1994), products like domestic appliances and television are internationally competitive despite negative protection (with domestic resource cost (DRCs) of 0.45 and 0.24 respectively). Further improvement in quality of such products and development of engineering sector carries a vast export potential. It will also reduce the vulnerability of Pakistan's foreign exchange earnings by making exports more diversified. Improving quality/standard of industrial sector. This may involve policies for building and upgrading conformity assessment infrastructure as well as policies meant to facilitate the private sector in attaining ISO-9000 certification for most of the exportable industries. Presently, the goverment provides financial support of Rs 200000 to any firm which attains such certification. Reorienting textile industry which is one of the country's well-established, competitively positioned and comparatively advantageous industry. The industry must be orientated towards higher-count yarn, fine cloth and value-added made-ups by all means. The comparative edge and strong position in textiles must be maintained. This must be kept in mind that the phasing out of quotas for items where quota restrictions have not been binding, will make the competition more severe in export market of these items. Preparation will have to be made to face this competition. Providing institutional support to small and medium enterprises (SMEs) which account for 1/3rd of manufacturing output with a significant proportion in exports. By virtue of producing medium-tech products with local raw material, the SMEs are easily amenable to restructuring and reorientation. The incentives may cover: credit, upgradation of technology, and support for export marketing. Credit is like nervus rerum for all industrial activities. The SMEs find it difficult to avail the existing credit facility because of collateral. Special windows be opened for this purpose. It is welcoming that in the 1999-2000 Trade Policy, export refinance facility available to the direct exporters has been extended to indirect exporters. The SMEs products are generally poor in quality partly because micro enterprises can not afford testing and precision facilities. Government may consider setting up

ii)

iii)

iv)

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institutions which provide common testing facilities and information on specification and quality. Incubator may be promoted in places of small industry clusters, for providing common facilities of Fax, Internet, and export marketing information. The newly established Small and Medium Enterprises Development Authority (SMEDA) is expected to take care of these needs of the SMEs. A project of establishing Cluster Council has also been approved recently. v) In the large scale manufacturing sector, productivity is an outcome of integration among vocational training, technology, R&D, and information services. Such integration does not exist at present. Some agency, like the recently established National Productivity Council, may act as a nucleus for ensuring the requisite integration with the objective of developing technology and human resources in line with the private sector needs. Foreign direct investment is the most convenient way of getting technology. To attract foreign investment especially in export sector, the pace of developing industrial zones along the Motor-Way needs to be expedited with one-window facility for all infrastructural facility put in place. As regards devaluation, since the country now has moved to a market-determined inter bank floating exchange rate system, it is expected that the exchange rate will take its correct value in accordance with demand and supply of foreign exchange. A safeguard mechanism is required against dumping as well as sudden surge in imports of some item from abroad, as both may cause injury to domestic industry. Presently, such issues are tackled by imposition of regulatory duty (central excise) on imports. But this is problematic as, for neutrality, any central excise levied on imports needs to be imposed simultaneously on domestic production. This means introducing distortions in the system. It also goes against the present thinking that there should be no central excise but only a general sales tax. An effective, WTO-consistent legislation needs to be put in place in this regard. As of today, the Anti-Dumping & Countervailing Duty Bill, though passed by the national assembly on July 22, 1999, is pended with the pending Senate. The Safeguards bill has been formulated but not yet been approved to become a law.

vi)

vii)

viii) Deletion Program In principle, Pakistan has agreed to phasing out its deletion program under the TRIMs provisions. This should not be a difficult task for a number of reasons: Firstly, the problem is not of a high magnitude, as the program has already achieved its objective to a significant extent. I ndigenization has exceeded 60% in almost all activities. The
deletion achieved is 100% in sub-sectors of transformers, electric motors, and pumps. It ranges between 80-90% in case of tractors, electricity meters, sugar plants, deep freezers, refrigerators, air conditioners, and fruit juice extractor. The sub-sectors with less than 80% deletion include: trucks & buses (58%), electric iron (74%), motor cycle (72%), and motor vehicles (64%).

Secondly, the remaining indigenization can be achieved, if at all, through incentivization rather than local-content restrictions. Under Article II of GATT 1994, Pakistans offer in respect of WTO bound tariffs covered 2128 items equivalent to roughly 1/3rd of total national tariff schedule. The rest of the items are unbound. Protection to the deleted

16

components can be provided through restructuring tariffs which are not included in the bound list. However, if putting into practice the option of incentivization takes time, a breathing space can be obtained by seeking extension in the deletion program through availing the flexibility under Article XVIII.B of GATT 1994 on the grounds of protracted balance of payments difficulties faced by the country, on the lines done by other developing countries, specially India. Thirdly, this is true that the TRIMs Agreement, containing inter alia provisions for local content requirements, did intend to facilitate foreign investment. But, if the developing countries offer, on their own, an attractive package for FDI, as actually has been the case, the industrial countries as well as multinationals will not feel the local content requirements as real irritant to foreign investment. Empirically they have found that the incentives given by the developing countries to foreign direct investment have led to trade promotion more than the trade hindrance caused by TRIMs. It is also obvious that the policy of reduction in tariff structure being pursued by developing countries under the WTO itself is likely to make the tariff concessions given under deletion programs less attractive for enterprises to opt for deletion. Moreover, in many developing countries including Pakistan, the set of incentive given to attract foreign investment in the last few years has eliminated the differential treatment between domestic and foreign investment. As a result of all this, it is argued that the developed countries by now have realized that the TRIMs Agreement is not something to be taken seriously and as such the TRIMs have receded to a secondary position. However, the industrial countries are planning to use TRIMs Agreement as a launching pad for moving towards a more comprehensive multilateral agreement on investment (see discussion in section V.2.1). The developing countries are required to formulate their point of view on this proposed agreement. Finally, it may also be kept in mind that since the TRIMs agreement itself is to be reviewed ( by virtue of falling under the Built-in-Agenda) by the close of 1999 or in the beginning of 2000, there is a possibility of having an amendment in the agreement to permit retention of some of the trade related measures. In fact, according to the present indications, some kind of consensus has already emerged among the major WTO participants in this regard. Demand-Side Policies Developing an institutional framework for market management and communication. In an environment characterized by tough competition, the role of marketing, advertising and communication on scientific lines cannot be underestimated. This is needed to pre-empt trade restrictions on account of allegations regarding labor standards, environment, and human rights. Such restrictions, though some times are used by industrial countries, are not part of the formal WTO arrangements. An effective institutional set-up is needed for: introducing new products through special incentives; channeling exports into new markets through an aggressive propagation campaign;

17

launching an effective communication campaign to convince importing countries that the goods produced in the country reflect competitiveness and that the competitiveness is based on genuine comparative advantage.

V. WTO-RELATED EXTERNAL/MULTILATERAL ISSUES AND STAND POINT OF THE DEVELOPING COUNTRIES

As mentioned in the Introduction, the existing WTO-related issues can be classified into three broad groups: V.A) Implementation/Review issues (regarding the existing agreements of ATC, DSU, TRIMs and TBT). V.B) and V.C) Coverage issues specific to Singapore Conference (investment and competition); New issues likely to be discussed in the coming negotiations (industrial tariffs, labor migration, labor/environment standards).

The discussion that follows in this section will take up these issues in the above order, spelling out the nature of the issues and suggesting stand point of the developing countries on each issue. But, first something about the strategy for future negotiations. Three distinct proposals regarding the scope and nature of the coming negotiations to deal with the issues have come on the surface. i). A `new round of multilateral negotiations' is being proposed by European Union, Australia, New Zealand, Argentina, and Mexico. This amounts to lumping all issue under one package and negotiate them as a single comprehensive undertaking. Firstly, this involves longer period. Secondly, issues which are of paramount interest to developing countries including Pakistan may be overwhelmed by issues having more interest to industrial countries. ii). A `sectoral approach' is being preferred by the US, which envisages negotiations in specific sectors with separate as well as short time frames. iii) A `cluster approach', being advocated by Canada, falls in between the comprehensive and sectoral formats of negotiations, and seeks negotiations in separate packages each pertaining to one of the broadly-categorized groups of issues as reported above. As a matter of strategy, developing countries including Pakistan should adhere to a cluster approach for negotiations. This approach is likely to yield quick results and in accordance with the preferences of developing countries. To ensure such gains, however, efforts will have to be made to get agreement on the following:

18

Issues are prioritized in a natural order (i.e., implementation issue first, followed by mandated review issues, Singapore issues, and new issues). Linkages are permitted between issues within a package (intra package) and not across packages (inter packages). Next package should not be undertaken unless the first one gets concluded in its entirety.

V.A

Implementation Issues

1. Agreement on Textiles and Clothing (ATC) The agreement on integration of textile and clothing sector into GATT 1994, including phasing out of textile quota restrictions under the MFA in operation since 1974, was hailed a great deal as it was expected to benefit the textile exporting countries including Pakistan. Pakistan, under the MFA, had quota restrictions in Canada, EU, Finland, Norway, and the US, many of which were binding constraints, particularly in the case of high value added items/categories. 8 However, the optimism faded significantly with the actual (unsatisfactory) implementation of the agreement during the past four years. Four aspects in this regard are worth noting: i) Since the integration has been programmed in four stages (16% on 1-1-95, 17% in 1998, 18% in 2002, and 49% on 1-1-2005) and since technically the importers have been given discretion to decide which products to integrate at each of the first three stages, the nature of the integration actually made by the major textiles and clothing importing countries in the first two stages has been such to include items which are either commercially insignificant or not constrained under the MFA (i.e., non-quota items), as very aptly reported in the UNCTAD Report (1998): "In the first stage, the mandatory integration of 16 per cent of 1990 import volumes was attained without any restricted item being integrated except for work-gloves by one country. Likewise, an evaluation of the products integrated in the second stage reveals little meaningful enhancement for market excess for developing countries. At the beginning of 1998 (i.e. the second stage), when a third of the 1990 import volumes of textiles and clothing had been integrated
8

This is clearly evidenced by the empirical data on Pakistans quota utilization, as shown below: Average Quota Utilization Rate (%) 1985 1986 1987 1988 1989 1993 87.3 82.2 96.1 88.1 94.2 90.0 114.7 106.1 90.8 105.3 119.2 100.0 Source: Reported in Standard & Poors (1998).

USA EU

19

into GATT discipline, only about 7 per cent of items restricted under the MFA had been integrated". p. 70. The country/region-specific details of 7% (6.77% to be precise) given in the same Report reveal 2.32% for Canada, 3.15% for EU, and 1.30% for USA. In the case of Pakistan, it is worthwhile to note that no item previously under quota has been included in the first stage of integration, and that the integration in respect of high value-added textile items which are of special interest to Pakistan has been postponed for the tail-end stage, a phenomenon being termed as `end-loading' 9 . It means that it will not be before 2005 that Pakistan sees its quota restrictions phased out. ii) Imports of textile goods are also being protected by the industrial countries, especially the US, through more restrictive rules of origin. For example, the newly proposed rule of the US implies that import by US of cloth from Pakistan and then converting it into bedsheets or garments for exports would assign the `origin of exports of bedsheets and garments to Pakistan' and this quantity will be deducted from Pakistan's textile quota for the US. This kind of rules of origin, being against the provisions of the ATC, will definitely disrupt trade in textiles and clothing from the way it had been originally envisaged under the ATC. The transitional safeguard mechanism provided under Article 6 of the ATC provides for new discriminatory restrictions if textile and clothing imports from a specific country mount to such increased quantity as to cause serious damage to the importing country's domestic industry. Since the lobby of textile protectionism is one of the strongest in the industrial countries, it is not surprising that this provision is being extensively misused by these countries for curbing textile imports. Along with the provision of phasing out MFA-based quota restrictions by the industrial countries (Article 2), the ATC also included provision for phasing out non-MFA restrictions on textile and clothing products (Article 3) which applies to all countries including Pakistan. Pakistan lowered tariffs and removed quantitative restrictions on textile and clothing imports in the first available instance after ratifying the WTO agreement. In contrast, the phasing out of the MFA quota by the industrial countries on the lines as mentioned in (i) above reflects a totally counter-reciprocal move. No progress has been made on the ATC provision (Article 1) for taking positive measures which reflect particular interest of the cotton-producing exporting countries, under which Pakistan would have been a definite beneficiary. These aspects suggest the following: a) The actual implementation of the ATC in the past four years has not only lagged behind the schedule, but has also negated the true spirit of the agreement, i.e. the enhancement in market access. Even the International Textiles and Clothing Bureau

iii)

iv)

v)

though under Article 2.8(a), the products to be integrated were to encompass products from each of the four groups, namely, tops and yarn, fabrics, made-up textile products, and clothing.

20

(ITCB), in the 29th Session of its Council of Representatives held in Pakistan on 1215 July 1999, expressed concern in this regard, saying that: the ATC of the WTO continues to be used by importing developed countries as a means of maintaining and diversifying restrictions in textile trade rather than a set of rules governing the transition towards full integration of the textile and clothing sector into GATT 1994 by the end of the year 2004. ITCB (1999), p.1. b) The arbitrary changes in the origin and administrative procedures stand against the declared textile policy of WTO and therefore are distorting the WTO's fundamental provisions on the subject . To the extent the transitional safeguard is used for nullifying the phasing out of textile quota, the ATC loses its relevance as one of the WTO's instruments for trade liberalization. Failure to regulate textile trade on the lines agreed under ATC might initiate retaliation on the part of developing countries to adopt protectionist policies in certain other areas of trade, which of course will be against the central mission of the WTO. Even otherwise, how one can agree to go for further trade liberalization when the liberalization envisaged under ATC , so important for the developing countries, has not been put in effect so far.

c)

d)

Suggested Action on ATC Despite the fact that ATC has several problems, it is not advisable to go for reopening the agreement. The problems are basically of implementation nature and need to be addressed for satisfactory implementation within the agreed framework. Following is suggested in this regard: To compensate for the commercially insignificant integration experienced in the first two stages, it must be sought that the third integration schedule due in 2002 includes adequate items to make the cumulated integration at least 50% of the quota items. There should be an affirmation that ATC will stand terminated on 1-1-2005 after phasing out 100% quota and that there will be no extension. With immediate effect, the products to be integrated under the ATC be limited to those currently restricted under the MFA. It may be ensured that the particular interest of the cotton-producing exporting countries, as provided for in Article 1 of the ATC, is duly reflected in the implementation of the agreement. 2. Dispute Settlement Understanding (DSU) and Anti-Dumping Provisions

21

Setting up of dispute settlement mechanism (DSU) was another outstanding achievement of the Uruguay Round. It was hailed on the grounds that it will strengthen the weaker trade partners against discrimination, make global trade more transparent, and combat behavior that contravenes the rule-based trading system discouraging thereby the unilateral actions by strong industrial countries. The actual experience in the past four years, however, has revealed certain limitations of this mechanism, which have serious implications for trade especially in industrial commodities for developing countries including Pakistan. A few are described below: i) The aggrieved member, after lodging the complaint, has to wait practically for more than two years before he gets decision. Even if the decision happens to be in his favor, this is no guarantee that he will also get the relief. This is so because the mechanism of enforcement of the decision is very weak and is based on moral suasion only. Whether the erring country does take the corrective measures or not, has entirely been left at his own sweet will. Preparing and presenting the case before the Panel (mostly through foreign legal experts) and collecting information needed for answering queries of the Panel, all involve high cost and that too with no guarantee that even the favorable decision will bring relief. This makes the aggrieved country reluctant to take up the case. Defense against dumping charges is costly, time consuming and quite complex because of the fact that according to the Anti-Dumping provisions, the anti-dumping cases are excluded from the purview of `normal' dispute settlement process of the WTO. The role of Panels of the settlement process has been made very limited in the anti-dumping cases; they can only determine whether the establishment and evaluation of the facts by the national authorities of the country imposing antidumping duties were proper and objective. In the Pakistan-USA famous Shrimp-Turtle dispute, the Appellate Body sought legal submissions from an NGO and reviewed them in the dispute settlement process, though no such authorization has been given by the Members. This is a dangerous trend in justice dispensation because most of the NGOs are sponsored by the developed countries and as such promote the interest of the latter.

ii)

iii)

iv)

v)

The faulty structure of the DSU as mentioned above implies the following: a) It discourages developing countries to seek justice from DSU, even if they are genuine victims of trade mishandling. As a corollary of (a), it encourages misuse of anti-dumping provisions as an instrument of protectionism to inhibit industrial imports especially textiles and clothing from developing countries. The extensive use of these provisions can be judged by the fact that, as reported in the UNCTAD Report (1998), as on 30 June 1997 a total of 957 anti-dumping measures were in force, initiated as large as 305 by

b)

22

USA, followed by European Commission (157) and Mexico (100). In the context of Pakistan, there is still an anti-dumping duty on its bed linen in the EU and on yarn in Japan. Similar duty has been imposed on grey cloth in EU three times in the last five years period. Making DSU an Effective Mechanism In international trade, justice dispensation, quick and in-expensive, is as important as the trade itself. The existing dispute settlement mechanism, with so many limitations as listed earlier, needs to be restructured to ensure the following: Bringing anti-dumping cases fully under the normal process of the dispute settlement mechanism so as to enforce the anti-dumping provisions in accordance with their spirit. The argument of `not having anti-dumping provisions at all', as being proposed in certain quarters, is not saleable as it will leave the trade regime at the mercy of whims rather than principles. Two things, in fact, are required simultaneously together: an agreed set of antidumping provisions; and enforcement of these provisions in accordance with their spirit, ruling out thereby the use of these provisions as an instrument of limiting market access. Reducing time given to the Panels. Fixing time for compliance of the decisions of the Panels. Making compulsory the compensation by the erring country for the loss incurred during the period of measure in question, in case decision goes in favor of the complaining country. Reducing the cost of case preparation and presentation to the Panel. This could probably be done by meeting a part of the cost from a DSU Fund to be created for this purpose with contributions from the member countries in proportion to the shares in world trade.

3. Technical Barriers to Trade (TBT) Agreement governing TBT prevents the member countries from using national or regional technical requirements/standards as (unjustified) technical barrier to trade. The agreement places emphasis on international standards relating to all types of products including industrial and agricultural products (except food items which come under SPS measure). The idea is that disciplining the standards would reduce the degree of discretion and flexibility in standards. Experience with the implementation of these standards in the past few years has revealed a number of shortcomings: The standards set by the international standards setting organizations are largely those relevant to the industrial countries as there is very little participation of the developing countries in these organizations. This points to an attempt to move to a unilateral international standard, with no account being taken of the different levels of development of other member countries while setting the standards.

23

The special and differential provision (Article 12) remained largely un-implemented. The provisions for technical assistance failed to develop facilities of processing technologies, research and establishment of national regulatory bodies in the developing countries.

Suggestion on TBT The imbalance in the existing agreement needs to be rectified otherwise all members can not equitably gain from the operation of the agreement.

V.B Coverage Issues Specific to Singapore Conference 1. Trade and Investment One of the Working Groups set up in the Singapore Ministerial Conference was to examine the relationship between trade and investment. The background has been the lobbying by many industrial countries for seeking a multilateral agreement on investment under WTO. One attempt on these lines was made by the OECD last year when it tried to negotiate a multilateral agreement on investment (MAI), but failed to do so. However, despite its abandonment by the OECD, there is a general belief that this may be one of the industrial countries' agenda items in the forthcoming negotiations, sponsored probably by Canada, Japan, and USA. According to the existing version of MAI, it proposes to prescribe stronger rules for seeking investment protection, investment liberalization, and dispute settlement for foreign investment, all under the sanctions of the WTO. The protection is being sought through setting standards for protection against expropriation, strife, subrogation, and transfer of capital, etc. Investment liberalization envisages national treatment and MFN, both pre-establishment and postestablishment. Dispute settlement contains state-to-state procedures and investor-to-investor procedures on financial and tax matters, environment matters, and matters related to multinational corporations. In summary, the agreement seeks to establish a series of rights and obligations such that the rights granted will go only to foreign investors/multinationals while obligations go just to the host governments. The investors rights would enable them to establish an investment, including purchase of lands and natural resources, under the deregulated terms set forth in the agreement. The governments will be obligated to ensure compensation for any action the country takes that undermines the ability of the foreign investors to profit from their investment. The implications of such an agreement are very clear. Firstly, the erosion in the ability of the nation states to exercise an independent industrial policy would be significant, even much larger than that implied by the TRIMs agreement. Secondly, concern has been expressed by the developing countries about the deeper interference of foreign investors as the proposal makes no distinction between external and internal trade, and also on the investors right to action against the government. Finally, by sharpening the process of widening of income gap between the industrial world and the developing counties, it would further depress the probability of catching up and

24

convergence (see section V.3.3). Stand on Investment Agreement The exact stand point of the developing countries including Pakistan on the subject would be possible once the exact nature of the proposed agreement becomes clear. Will the efforts focus on the present version of MAI or on seeking convergence somewhere between TRIMs and MAI? is not yet clear. On the basis of present indications, though one can see some advantage in the establishment of a rule-based system for investment under an investment agreement, many questions arise which, if not addressed properly, would make it difficult for the developing countries to support the idea: Is WTO the proper forum for such an agreement? In fact, any idea of widening the scope of WTO beyond its exclusively-focussed trade matters will have to be very carefully examined. If investment (capital mobility) is proposed to be brought under an agreement, what about its counterpart, i.e., labor mobility? While the proposed agreement will ensure added advantages to the industrial countries, what is the quid pro quo, i.e., the reciprocal additional advantages to be reaped by the host (developing) countries? One should not forget that the structure of WTO is premised on the principle of mutual gain and reciprocity. How the scope of investment measures can be extended unless a proper implementation/evaluation of the TRIMs agreement already in force since 1995 is made, knowing well that its negative impact in terms of erosion of the ability of nation states to exercise their sovereign industrial policy would be much sharper than that of the TRIMs agreement? What is the guarantee that the concerns of the developing countries regarding the short term capital flows especially under portfolio investment (which caused financial crisis in East Asia in 1997) and their post-crisis thinking to impose some kind of restrictions on these flows, will be adequately taken care?

2. Trade and Competition Similar to the Working Group on Trade and Investment set up in the Singapore Ministerial Conference in 1996, a Working Group was also set up to look at the interaction of trade and competition. Because of suspended Seattle discussions on the agenda for the next negotiations, presently it is not very clear whether and to what degree of sensitivity the issue will be taken up in the coming negotiations. Nevertheless, it is advisable for the developing countries to examine the issue in the light of the concerns raised by the Working Group and develop their own view point. The basic philosophy behind the issue is the integration between trade and domestic competition rules, i.e., how domestic competition laws and their enforcement interface with rules of

25

international trade. The interest is to propose regulations under the WTO umbrella on how domestic competition policies including deregulation, privatization, antitrust, and trade liberalization affect international trading partners. Stand on Competition Policy It is rather difficult to spell out a categorical stand point of the developing countries including Pakistan on the subject as it is highly technical and requires an in depth investigation which is beyond the scope of this paper. The competition laws cover a whole variety of conducts of producing and marketing firms, like, monopolies, collusion, cross-border mega mergers, international market sharing arrangements, exclusionary vertical arrangements in distribution, etc. Moreover, the subject involves a two-way causation. While anti-competitive practices have implications for trade liberalization, the trade measures, such as anti-dumping and intellectual property rights, give birth to anti-competitive conducts. It is not difficult to point out some gains that are likely to be gained by the developing countries from an international competition policy. It is expected that the policy would act as a constraint on the anti-dumping actions by the industrial countries as well as on the collusive behaviour of the multinationals. But at the same time one can argue that acrossthe-board application of such a policy will limit the role of public sector in many developing countries as a guardian of public interests through maintaining trusts and monopolies in certain critical economic areas. An added complication arises when one looks at the prospects of having an international competition policy or an international competition authority, especially in the midst of opposing lobbies by many powerful countries and private agencies. 3. Government Procurement Another area assigned for investigation in the Singapore Conference pertained to transparency in government procurement, covering aspects of national legislation, tendering and qualification, decisions on qualification and contract awards, and suppliers complaints. Once the investigation work gets concluded, an agreement on transparency is likely to be proposed. The forthcoming negotiation may have discussion on this subject. Pakistan may have no objection on an agreement on transparency in government procurement. In fact, Pakistan follows the World Banks guidelines for procurement of goods and equipment for the Bank-funded projects. The guidelines primarily call for international competitive bidding. One does not see any problem in applying the same guidelines to procurement of goods under trade . V.C New Issues According to para 9(d) of the Declaration of the 2nd Ministerial Conference held at Geneva in May 1998, members may propose new issues for negotiations under the WTO. There is a thinking among the industrial countries to float a proposal of new negotiations for further reduction in industrial tariffs. There are also indications of references to be made by these countries on labor and environment standards. While the developing countries should have a

26

clear view point on both these issues, they should also pro-actively take up issues which are of their specific interest. The latter may include wide dispersion in tariffs in industrial countries, discrimination implicit in preferential trading arrangements under regional blocks as well as under GSP, and asymmetry in factor mobility. These issues are discussed below. 1. Industrial Tariffs The idea of new negotiations for reduction in industrial tariffs comes notably from Australia, New Zealand, the US, and the EU. Those countries which are in the process of trade liberalization on their own initiatives will find it easy to support the idea. Even those who are restructuring their tariff system under the IMF-World Bank supported structural adjustment program are also expected to join the move. A broader support , however, can be ensured only when the concerns of the developing countries regarding some of the irritants of the existing industrial tariffs are adequately addressed. Three such irritants are reported below. a) Wide Dispersion in Tariffs in Industrial Countries: This is true that in the wake of various Rounds of negotiations organized under GATT including the last one of Uruguay, average tariff rates on imports in industrial countries have reduced substantially; the average rates range between 3-5%. In the US case specifically, the Uruguay Round accord implied reducing tariffs on industrial products from an average of 4.7% to 3%. But, the average conceals many outliers. It is interesting to note that some items still are subject to tariffs as high as those found in many developing countries. According to the United Nations, as reported in ADB (1999), average tariff rates on products in textiles category are 15% in the US, 9% in the EU, and 8% in Japan. Many items within this category attract even much higher rates. For example, in the US, tariff rates on more than half of all textile and clothing imports are in the 15 to 35% range. Despite the Uruguay Round, tariffs on leather, rubber and footwear remain at 8% in Japan, 7% in the US, and 5% in the EU. In the context of Pakistan and so for other South Asian countries, this means substantially high tariffs on their major industrial exports, representing formidable barriers for their export expansion. Reduction in tariffs such that the dispersion is minimized would be welcome by Pakistan and other concerned countries. b) Preferential Treatment under Regional Blocks/GSP One of the two exemptions provided in the Most-Favored-Nation (MFN) clause of the GATT/WTO pertains to regional cooperation (the other pertaining to the Generalized System of Preferences (GSP)). While MFN provision seeks for non-discrimination in trade barriers across nations, the regional cooperation provokes discrimination against countries outside the regional block. Yet, the latter was permitted as an exception to MFN arguing that regional cooperation was also a step towards trade liberalization at least within the group of countries forming the trade block. Although all but three of the WTO's 135 members (the exceptions being Japan, South Korea and Hong Kong) belong to at least one regional block, it is not yet categorically concluded that regional block does supplement the global trade liberalization efforts. Even the World Bank (1991) expressed caution about the role of regional blocks in overall trade liberalization when it

27

remarked: "Freeing trade within regions---as in the case of Europe's Project 1992, the United States-Canada Free Trade Agreement of 1989, and the proposed trade agreement for Canada, Mexico, and the Unites States---is beneficial. But it remains to be seen whether regional blocks will support or hinder the goal of a more open global trading system". p.8. One piece of empirical evidence regarding the discriminatory nature of regional block is the Pakistan vs. Turkey case of textile trade with EU. Because of EU-Turkey Union, Turkey does not face any tariffs in the EU, whereas Pakistan faces 12% tariff. This puts Pakistani exporters of textiles to EU at a cost disadvantage of 12%. A similar example can be cited for Pakistan vs. Mexico textile trade with the US. Mexico, being a member of NAFTA, faces zero tariffs on its exports to US whereas Pakistan faces 25% duty. Again, the Pakistani exporters of textiles are put to a cost disadvantage of 25% compared to Mexican exporters. Even larger discriminatory effects are created in trade under the Enabling Clause/GSP Scheme whereby some countries enjoy preferential market access in the EU by virtue of their being the least developed. 10 Bangladesh is one such example. Again, a reduction in industrial tariffs which minimizes the extent of discrimination would be welcome by all those who are subjected to such discrimination. c) Differential in Absolute Levels of Sacrifice By virtue of being under developed, the levels of tariff in developing countries are much higher than those in the developed countries. Under this situation, a uniform reduction in tariffs of any percent that may be agreed upon in the negotiations will require the developing countries to give much larger concession (in percentage-point terms) to the developing countries as compared to the concession they will receive in exchange from the developed countries. This is an argument on the basis of which many developing countries tend to oppose the idea of further reduction in industrial tariffs, and as such needs to be addressed. Suggestions on in Industrial Tariffs The three irritants, as spelled out above, make it clear that a broader support to the idea of negotiations on industrial tariffs depends on whether and to what extent the proposed scheme of tariff reduction minimizes the dispersion, does away with the discrimination, and ensures equal sacrifice (in terms of concession) on the part of developed and the developing countries. Following may be suggested in this regard. A rule needs to be agreed upon that no individual tariff should exceed the average tariff by more than 100%. If, for example, the average rate is 3.5%, this means that no tariff on individual item exceeds 7%.

Also, under preferential trading arrangements usually formed under regional blocks, special treatment is extended to the least developed partners in the form of `no reciprocity' or zero rated tariffs.

10

28

The countries which provide preferential treatment under preferential trading arrangements (PTAs), GSP, and/or enabling clause should give priority in tariff reduction to those items which are covered under this treatment. The tariff reduction be proposed in percentage-point terms rather than in percent.

2. Labor Standards and Environment Issues There is a perception in the Western World that low labor standards, such as use of child labor and little attention paid to environmental protection, in many developing countries enable them to keep their labor costs low and thereby confer on them an "unfair' competitive advantage in trade---a phenomenon usually termed as Social-and Eco-Dumping. Some of the industrial countries therefore advocate imposing trade restrictions against developing countries that fail to enforce minimum level of labor and environmental standards. In the Ministerial Conference in Singapore, it was declared that labor standards will not be used for protection purposes and that these standards will be dealt with by ILO alone. Yet the issue is not completely dead as it still lures many industrial countries to restrict imports on the basis of these standards. For example, on the plea of labor standards, the US withdrew GSP on imports of carpets, sports goods, and surgical goods from Pakistan. On the environment, the WTO Committee on Trade and Environment established in 1995 is still looking into the scope of the complementarities between trade liberalization, economic development and environmental protection. Yet, quite often, one hears the echo of the environment arguments being used as pretext for market access denial by industrial countries. The embargo on shrimp imports from Pakistan by the US in 1996 on the plea that shrimp catching is adversely affecting the turtles, is a famous example in this regard. The developing countries have totally a different point of view in this matter. First of all, it is believed that the allegations about the use of child labor are exaggerated as the issue is not properly understood in the West. If child labor is used at all in some parts of the developing countries, it may be viewed as a temporary phenomenon triggered by households economic compulsions and will mitigate as these countries become better off. Secondly, many aspects of environmental pollution are not limited to national boundaries. The West, by virtue of being industrialized, is believed to produce industrial waste, gas emission, and nuclear radiation much much more than the entire developing world. This imposes a larger responsibility of environmental protection on the industrial world. Thirdly, linking non-trade issues with trade is logically incorrect. Fourthly, bringing these issues within the purview of WTO is basically asking too much from this organization.

29

Fifthly, since it is drastically difficult to assess objectively whether and to what extent there is violation of the norms of these standards, the decision about trade sanctions on these basis would be predominantly arbitrary giving birth to innumerable disputes. Lastly, if trade sanctions are really effected in response to such arbitrary decisions, trade will be restricted to the extent that it will nullify the whole trade liberalization efforts of the WTO. Stand on Labor/Environment Standards The issue of labor standards has almost equal implications for all the developing countries. As such, there is a likelihood of a complete consensus among them to stick to what was declared and agreed in the Singapore Ministerial Conference and resist any reference to be made on labor standards in future negotiations. This consensus must be preserved and displayed in case such a reference is made. On the environment issue, no body will disagree that it is worth attending on its own merit. But in the present context, the question is how the market access to the developing countries will be affected by bringing it under the WTO purview. It is also note-worthy that discussions held in the Committee on Trade & Environment, set up at the Marrakech Ministerial Meeting to identify the relationship between trade measures and environmental measures, have revealed wide divergence in views on the said relationship. This lack of unanimity on the subject tends to support the developing countries' stand of delinking this non-trade issue from trade by agreeing to a principle that all non-trade issues be dealt with by the appropriate agencies of the United Nations. In support of the de-linking hypothesis, it will not be out of place to mention that the Third World Intellectuals and NGOs Statement Against Linkages (TWIN-SAL), signed by 103 signatories and published in the November 1999 issue of Economiquity (CITEE, 1999), also reflects the unambiguous opposition to linkage of labor and environment standards to WTO and to trade treaties. The final paragraph of the statement reads as follows: It is time to raise our voices and call a spade a spade. The WTOs design must reflect the principle of mutual-gain; it cannot be allowed to become the institution that becomes a prisoner of every developed-country lobby or group that seeks to advance its agenda at the expense of the developing countries. The game of the lobbies in the developed countries seeking to advance their own interests through successive enlargement of the issues at the WTO by simply claiming, without any underlying and coherent rationale, that the issue is trade-related, has gone too far already. It is time for us to say forcefully: Enough is enough. (p.4) While maintaining a unified stand on the issues of linkages is necessary, this does not, however, warrant complacency on the part of the developing countries including Pakistan regarding their own process and production methods (PPMs). They should seek to create a set of transparent polices with respect to labor and environment standards to avoid un-necessary use of anti-dumping and countervailing duties. In the case of Pakistan, it is noteworthy that in order to discourage child labor, the Government, in its 1999-2000 Trade Policy, has decided to provide financial assistance to the Carpet Association for the next two years. Also, to help rehabilitate children, the Child Labor

30

Foundation would be provided a grant of Rs 20 million. This is definitely a measure in the right direction. With the collaboration and technical assistance of UNIDO, the Government of Pakistan is also preparing for establishment of a National Cleaner Production Centre (NCPC) as well as a number of industry-specific cleaner production centres, the latter to cover oil refining, textiles, leather, and sugar industries in the first phase. 3. Asymmetry in Trade in Factors of Production One corollary of the basic Heckscher-Ohlin theory of international trade is that international trade tends to equalize the relative and absolute returns to homogenous factors of production across nations 11 . As such, international trade especially in manufactured goods (which use movable factors of capital and labor rather than immovable land) is taken as a substitute for international exchange of capital and labor. If, in addition to the trade, these factors themselves become internationally mobile, the process of equalization of factors' returns is expected to become even faster. In the contemporary world, in contrast to the almost free movement of capital from the capital-abundant developed counties to the developing countries both in the form of debt inflows and equity flows12 especially in industrial sector, the regime for industrial labor movement from the labor-abundant developing countries to the developed ones is highly restricted.13 This is giving birth to an unpalatable pattern of world income distribution. The process of redistribution can be perceived as follows: Empirically, capital is abundant in the industrial countries and scarce in the developing ones. This means that return to capital is relatively low in the industrial countries compared to that in the developing ones. If so, then, whenever capital moves from a developed to a developing country, the process of equalization of factors returns will raise the return on capital in the industrial country and lower it in the developing one.

11
12

Rigorous proof of this factor price equalization theorem was provided by Samuelson (1948). Bln $ 1998 150 41 109

The latest trends in such flows are shown below: A. Total Debt inflows Equity flows B. Total (destination-wise) Asia Latin America Eastern Europe/Africa 1996 317 183 134 1997 283 141 142

317 283 150 171 109 48 82 90 78 64 84 24 Source: UNCTAD (1999).

Only a limited commitment has been given under the General Agreement on Trade in Service (GATS) on movement of labor as a mode of service delivery (movement of natural persons).

13

31

Since most of the capital is owned by the industrial world, the benefits of equalizing differences in returns will be reaped by the developed countries. Had l abor been a mobile factor, the benefits would have accrued to the labor-abundant developing countries where wages are low compared to the industrial world. With this process in practice, it is no wonder if, under the existing pattern of factor mobility, the income disparity between the industrial and the developing countries continues growing, minimizing thereby the probability of north-south convergence. Very aptly, H.G. Johnson, as back as in 1967, had hinted towards inefficiencies being caused by the lopsided trade in factors. "Immigration policies of developed countries, which discriminate severely against immigrants from less developed countries, especially the poorly trained and educated, may be said to lie at the core of the development problem". Johnson (1967), p. 107 It would be in the global economic interest if in the coming negotiations due consideration is given to initiating the process of labor mobility, specially when some of the industrial countries are further lobbying for seeking a multilateral agreement on investment under WTO. Removing Asymmetry in Factor Mobility The stand of the developing countries including Pakistan on this issue should be very clear. Goods that are traded internationally are produced with three factors of production: capital, labor, and technology. Though most of the transfer and mobility of capital and technology across countries take place independently of WTO, even under the WTO one finds some kind of arrangement in this regard, e.g., TRIPs for technology and TRIMs for capital. But no such arrangement exists for labor. The neutrality of benefits accruing from factor mobility can be ensured only if all the factors are mobile in equal degree. This requires that either labor mobility be permitted or capital/technology transfer be constrained. Since constraining the latter which has already become a norm would be a regressive and an inward-looking step, it is advisable to promote labor mobility so that the efficiency gains accrue to the owners of capital, technology, as well as labor. It is, therefore, legitimate to seek an agreement on Trade Related Labor Measures (TRLMs) asking the developed countries to extend MFN and National Treatment clauses to the import (and employment) of labor from developing countries. On the basis of legitimacy of the proposal with its noble objective of removing global distribution inequality that empirically exists on account of not allowing labor mobility parallel to the capital mobility, it can be expected that the proposal could get an unconditional acceptance in the negotiations. Display of complete consensus by the developing countries on the proposal is essential as it will enhance the probability of its acceptance. In case, it turns out to be difficult to get the proposal through on merit, the proposal of labor mobility could be linked to capital mobility. VI. CONCLUSIONS

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The main challenges emanating from the enforcement of the WTO-based trade system, on the domestic front, are: how to maintain competitiveness in the face of falling protection to industry through reduction in tariffs; and how to pursue national industrialization objectives when indigenization programs are to be phased out . These needs to be handled through a close partnership between public and private sector. While the actual responsibility for restructuring the industrial sector lies with the private firms, the government may help by providing an enabling environment for the required restructuring. On the external side, some of the issues to be discussed in the forthcoming negotiations are `new while others pertain to the `implementation/review of the already agreed arrangements under the WTO. It would be desirable to adopt a `cluster approach in the future negotiations. As regards the agenda to be pursued in these negotiations, it should comprise the following: Seeking improvement in the rules as well as implementation of the rules, relating to antidumping, DSU, ATC, TRIMs, and TBT; Seeking reduction in industrial tariffs such that it reduces the dispersion around the mean tariff; focuses on those items which are covered under preferential treatment; and implies equal absolute sacrifice on the part of both developed and developing countries. Seeking agreement on trade related labor mobility measures; and Developing a unified stand and consensus on a general principle that all non-trade issues be handled outside the WTO purview (these may include issues of labor standards, environment, and investment). Besides seeking improvement in the rules, it is equally important that the developing countries create transparency in their own process and production methods so as to address the concerns of the developed countries and thereby pre-empt un-necessary trade restrictions on their exports. These countries need to be pro-active in this regard, rather than lamenting on the lack of institutional capacity, skill, and finance needed to handle the issues of labor standard and environmental protection.

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REFERENCES ADB (Asian Development Bank) (1999), Asian Development Outlook 1999, Oxford University Press, New York. CITEE (Centre for International Trade, Economics and Environment) (1999), Challenging Linkages of Trade to Non-Trade Issues, Economiquity, November, pp.2-4. IMF (1999), International Financial Statistics, November. ITCB (International Textiles and Clothing Bureau) (1999), Bhurban Communiqu, Council of Representatives, XXIX Session, Bhurban, Pakistan. Johnson, H.G. (1967), Economic Analysis Towards Less Developed Countries, Praeger, New York. Kemal, A.R., Mahmood Zafar, and Ahmed, Ather Maqsood (1994), Structure of Protection, Efficiency, and Productivity, PIDE, Islamabad. Naqvi, S.N.H., Kemal, A.R., and Heston A. (1983), The Structure of Protection in Pakistan: 198081, PIDE, Islamabad. Pakistan, Govt of (1997), CBR Statistical Year Book 1995-96, Central Board of Revenue, Ministry of Finance, Islamabad. Pakistan, Govt of (1997a), Employment and the Manufacturing Sector of Pakistan, Planning Commission, Islamabad. Pakistan, Govt of (1998), Pakistan's Foreign Trade Key Indicators 1997-98, Ministry of Commerce, Islamabad. Pakistan, Govt of (1999), Economic Survey 1998-99 (Statistical Supplement), Ministry of Finance, Islamabad. Samuelson, P.A. (1948), International Trade and the Equalization of Factor Prices, Economic Journal, June, pp. 165-184. Standard & Poors (1998), Tradelink Pakistan: An Agenda for Liberalising Trade & Promoting Exports (Final Report), DRI/McGraw-Hill (for the Asian Development Bank), P.32. UNCTAD (1998), The Least Developed Countries: 1998 Report, United Nations, New York and Geneva. UNCTAD (1999), Global Economic Conditions and Prospects, Geneva. The World Bank (1991), World Development Report 1991, Oxford University Press. The World Bank (1999). Pakistan Economic Report, Poverty Reduction and Economic Management; South Asia Region, April 8.

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Appendix WHY INDUSTRIALIZATION IN PAKISTAN COULD NOT TAKE OFF UNDER THE IMPORT SUBSTITUTION REGIME? Pakistan was not the only country to adopt import substitution strategy in the 60s. Several other countries both in East Asia and Latin America were also on the same policy track. But while many others made a significant headway towards industrialization, Pakistan lagged behind. In fact, the momentum of industrial growth which started and accelerated during the 60s under the import substitution strategy lost its momentum in the 70s. Some of the contributory factors are analyzed below: 1. High degree of industrial inefficiency: The volume of protection provided in Pakistan was one of largest. Various studies done on the effective protection rates (EPRs) in Pakistan in the 60s concluded that the extent of protection was indeed large, and for some industries it turned out to be the negative value added case, i.e. where net subsidy exceeded the value added. For example, the average level of protection provided by all sources (tariffs plus non-tariffs), was as large as 271%. EFFECTIVE IMPLICIT RATES OF PROTECTION: 1963-64 Industry Average EPRs (%) -----------------------------------------------------------------------------------Consumer goods 883 Intermediate Goods 88 Capital Goods 155 Total Manufacturing Sector 271 ----------------------------------------------------------------------------------Source: Lewis and Guisinger (1968).1 In contrast to this, the EPR was only 27% in Mexico, 33% in Taiwan, 49% in Philippines, and 118% in Brazil. 2 This resulted in an inefficient industrial structure producing with high resource cost. According to Balassa3 , the net cost of protection in case of Pakistan for 1963-64 was estimated to be 6.2% of GNP, compared to 2.5% for Mexico, 3.7% for Philippines, 1.8% for Norway, and 9.5% for Brazil. Operating within a highly-sheltered environment with no export obligation and no exposure to international competition, the infant industries remained infant for a long period. 2. Failure to take import substitution to its logical conclusion: Most of the industries which were provided protection under the import substitution strategy pertained to consumer goods for
1

S.R. Lewis and S.E. Guisinger, (1968), "Measuring Protection in a Developing Country: The Case of Pakistan", Journal of Political Economy, Nov.Dec.
2

I. Little, T. Scitovsky, and M. Scott, (1970), Industry and Trade in Some Developing Countries: A Comparative Study, OECD, London.
3

Bela Balassa, (1971), The Structure of Protection in Developing Countries, John Hopkins Press, Baltimore.

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which there was an ample domestic market available to start with. After meeting the domestic market, there were two options available; either to move into a typical secondary or backwardlinkage type of import substitution, or to shift the strategy for industrial development from the domestic market to international market. The former could not be adopted as it required heavy investment in capital goods industries which could not be afforded. The latter needed production of quality products at competitive rates for international market, which was missing due to inefficient industrial structure. Looking at Taiwan's experience for comparison, it is found that Taiwan was able to opt for shifting to international market as its products, being of good quality, found new markets. It is not surprising that during 1961-72, Taiwan's exports grew at 30% per annum and the export/GNP ratio rose to 40% by 1972. By 1979, this ratio had gone to 50%, one of the highest in the world.4 Similarly, the Korean experience was different. The targeted infant industries were granted absolute protection through quantitative restrictions on imports giving them a guaranteed domestic market. But at the same time, the protected infant industries were asked to export a rapidly growing proportion of their produce at world prices with no subsidy. In Singapore, the protection to those infant industries that failed to grow within a pre-specified period was automatically removed. 3. Food shortages and imports: In a relentless drive to industrialization, agriculture was relatively ignored. The agriculture terms of trade deteriorated significantly. It led to food shortages. The shortages were further aggravated by the US suspension of PL-48 in 1965 after Pak-India war. All this, and at a very critical time, forced the economy to divert part of its scarce foreign exchange from import of investment goods and industrial raw material to food imports. 4. Massive nationalization of industries: Though the 70s should have been the period of adjustments in the protective regime as one finds in the case of Korea, Taiwan and Singapore, Pakistan, while continuing the regime, nationalized 32 major industries alongwith financial institutions in 1972. By opening a gateway to corruption and politicization of decision making in the nationalized industries, this step had a strong dampening effect on industrial growth. The large scale manufacturing growth rate decelerated to 3.6% during the following five years. 5. Mounting trade deficit : As a result of liberal import policy in respect of capital goods and raw materials, import growth rate accelerated, and despite visible increase in exports owing to export bonus scheme, trade gap widened from an annual average of $159 million during 1955-60 to $366 million during 1965-70. Though the distortions created by the Export Bonus Scheme were removed by abolishing the scheme and compensating it by a massive devaluation from Rs 4.75/$ to Rs 9.9/$ in 1972, the exports could not pick up partly because of the already existing substantial anti-export bias in the trade regime, and partly due to the depressed growth in manufacturing on account of nationalization. The oil shock in 1974 further aggravated the balance of payments problem, escalating the trade deficit to $1.5 billion by 1977-78. The combined outcome of the above factors was that the country missed the opportunity to have an industrial take off.

John C.H. Fei, G. Ranis, and W.Y. Shirley Kuo (1979), Growth With Equity: The Taiwan Case, Oxford University Press, New York (for the World Bank).