Bumpy road to export-led growth

AI Summary

Pakistan’s government has relied on subsidies and concessions to promote exports, but export growth and industrial competitiveness remain weak despite ambitious targets. The article argues that productivity, technology investment, liberalized trade and better export financing are needed to build a stronger industrial base.

In an unusual public expression of dissatisfaction, Prime Minister Shehbaz Sharif has voiced displeasure with exporters’ performance despite what he described as ‘several incentives’ extended to them in the last federal budget. His remarks raise questions not only about the effectiveness of government support but also about the commitments, if any, made by beneficiary industries to increase exports in return. The problem reflects a persistent failure to distinguish between export promotion, export-led growth and export-led industrial transformation. The first seeks to increase foreign sales of existing products, the second makes exports a driver of economic expansion, while the third requires sustained investment in technology, productivity and higher value manufacturing. Export-led growth is a favourite phrase for politicians to use in their policy statements without consistently translating it into industrial development. Official data and reports showed Pakistan’s policies have largely focused on export promotion through subsidies and concessions to established industries. The Commerce Ministry’s Rs25 billion subsidy package for rice exports and similar demands from the textile sector illustrate this approach. The history is full of rebates, concessions and cash subsidies to suppress prices of commodities. The underlying question is whether economic policymakers and influential industrial groups have prioritised short-term export incentives over investment in competitive industries. Despite merchandise exports averaging around $2.5bn a month, Planning Minister Ahsan Iqbal announced targets of $60bn in May 2025 and $63bn in August 2026, both to be achieved within five years. Since Independence, industrial development has relied heavily on import substitution, encouraging production for a protected domestic market Official statements have also envisaged $100bn in exports by 2035. However, annual merchandise exports have remained between $30bn and $32bn in recent years, exposing the gap between official ambitions and productive capacity. The World Bank’s October 2026 Pakistan Development Update, titled Attaining Escape Velocity, calls for continued tariff liberalisation, improved export standards and greater access to export financing to strengthen competitiveness. The bank’s historical data shows that exports of goods and services declined from a peak of 17.3pc of GDP in 1992 to around 10pc in 2025, indicating that exports have failed to keep pace with economic expansion. Former commerce minister Humayun Akhtar Khan attributed this declining share to a shrinking industrial base and stagnant productivity caused by inadequate technological upgrading. He said Pakistan’s competitors were producing cheaper, more competitive goods by adopting modern technology, while domestic industries continued to lag behind. “The exchange rate no longer has any meaningful link with export growth,” Mr Khan said, calling for a focused industrial policy to reverse de-industrialisation and expand production capacity. The IMF’s 2024 Article IV consultation report provides further evidence of limited industrial diversification. It noted that Pakistan ranked 85th on the Economic Complexity Index in 2022, unchanged from its position in 2000, with exports heavily concentrated in textiles and agricultural products. The ranking suggests limited progress in developing more sophisticated export products. The experience of East Asian economies offers a contrast. According to the World Bank’s 1993 study, The East Asian Miracle, countries such as South Korea and Taiwan combined export expansion with industrial investment, technological upgrading and productivity growth. Their experience illustrates how export promotion can contribute to industrial transformation rather than merely increasing foreign sales of existing products. Pakistan followed a different course. Since independence, industrial development has relied heavily on import substitution, encouraging production for a protected domestic market. Subsequent export promotion measures emphasised subsidies without consistently improving industrial productivity, while investment increasingly favoured services, particularly real estate. The Planning Commission’s Annual Plan 2024–25 highlighted this imbalance, reporting that manufacturing accounted for only 10pc of private investment, compared with 21pc for real estate activities and 30pc for agriculture. It also observed that manufacturing’s investment share was declining. The trend continued in FY25. According to the State Bank of Pakistan’s Annual Report 2025, private investment in manufacturing declined for the fourth consecutive year, while overall private investment increased modestly, mainly in services. The bank also reported that increased fixed investment financing largely supported efficiency improvements and infrastructure upgrades, with relatively few industries borrowing to expand production capacity. Compounding these weaknes