PAKISTAN POLICY NOTE—REINVIGORATING THE AGENDA FOR OPEN TRADE 1 THE WORLD BANK GROUP SOUTH ASIA REGION JUNE 2013 Pakistan Policy Note 2 José G. Reis, Daria Taglioni, Charles Kunaka, and Nihal Pitigala Reinvigorating the Agenda for Open Trade Pakistan’s trade performance is disappointing. Despite being in a very dynamic region, the country’s position in world trade has barely changed over the past three decades. The trade to GDP ratio showed only a very small increase in the last decade. Exports generally lack sophistication, and dynamism (as marked by entry and exit in foreign markets and new exports) has declined in recent years, coinciding with the reversal of trade policy to a less open stance since the mid-2000s. Open trade is central to any growth strategy—worldwide, no successful growth story has exclusively featured inward-looking growth. Restor- ing the country’s place in international markets is thus critical for resuming growth, raising produc- tivity, and creating jobs. To improve its trade com- petitiveness, Pakistan needs to simplify tariffs and trade regulations in order to reduce the anti-export bias; accelerate deep preferential trade agreements to encourage trade creation; fully normalize trade rela- tions with India to benefit from growth there; and address logistical weaknesses to reduce trade costs. Trade is an integral part of Pakistan’s growth agenda. The country has failed to benefit from the trade bonanza in both South Asia and the world, and its position in global trade has changed little over the past three decades. While its world market share has declined over the last 20 years (despite a moderate recovery after the global crisis), those of Malaysia, Mexico, and Thailand have doubled, and China’s tripled. Aided by large reductions in trade barriers and techno- logical advancements, developing countries— led by China and other emerging markets—have become major drivers of global trade. There is now little dispute that, in the long run, econo- mies more open to trade show stronger economic growth and overall development performance, including export growth (Dollar and Kraay 2002, 2004; Michaely, Papageorgiou, and Choksi 1991; Winters, McCulloch, and McKay 2004). Pressure is growing on developing economies to improve productivity and restructure industry. World trade has undergone a dramatic trans- formation over the past decade and is increas- ingly characterized by global fragmentation of production leading to greater trade and a wider variety of traded goods and services— a trend that has largely eluded Pakistan. The evolving trade landscape, dominated by emerg- ing economies like China and India, is likely to exact more pressure on firms in other develop- ing economies, such as Pakistan, to improve productivity and restructure the industrial sector to enhance their competitiveness so that they can benefit from international market opportunities. Steps to enhance domestic com- petitiveness are becoming more important—as is how they measure up to competitors’ actions. Pakistan’s recent trade performance is one of stagna- tion, as indicated by a very small increase in its trade to GDP ratio over the last decade. 1 Peer countries have leapfrogged with high growth. Pakistan’s position below the predicted line indicates that it “undertrades” relative to countries at compa- rable GDP per capita incomes (Figure 1). 2 What Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized 79559