The recent announcement by Tundra Fonder, a Swedish asset manager focused on frontier/emerging markets, to open a Karachi office did not go unnoticed. While it has been running its Pakistan fund for some time, opening of a physical presence holds significance. With a stable democracy in place following the smooth transition of government, these developments indicate the evincing confidence of the global community in investing into a localized on-ground engagement. But my objective is not to discuss Tundra or KSE. The objective is to understand how the economy can leverage this current improving climate for a more holistic economic agenda. After all, annual GDP growths of ~3% in recent years do not do justice for a country of 180 million.
While recent positives highlighted in the 2nd review of the IMF assistance suggest the economy is taking constructive shape, a lot is still needed to sustain that graph. Graduates and professionals are adding each year. If job creation fails to keep pace with talent supply, then the youth’s restlessness with the establishment will only increase. Once organized job market brings in more people within its fold and income sustains a northward trend, the community’s purchasing power rises and creates more demand, thus turning the economic engine with a multiplier effect. Apart from jobs, recent newsflow suggests key challenges facing the economy are broad- basing the economic engine, boosting exports, increasing FDI, reducing dependence on foreign assistance through fiscal self-sufficiency, and converting into a more producer-oriented nation.
These challenges are already known to everyone. Potential solutions are also known. But like I mentioned, how can the economy utilize this improving climate to hasten the economic chart? At such stages, it is imperative to identify and build upon areas of ‘competitive advantages’. These are areas where a country already has some inherent resources, which act as a foundation. Thereafter, once it invests to further develop the talent, processes and competencies of these sectors, they have the potential to grow much faster than other sectors. This helps it become a producer-nation of choice in the global arena in those areas. The aim is to become specialists in areas of competitive advantages so that it becomes a country of ‘first-recall’, or at least ‘initial- recall’, when foreign partners are looking to source or invest. Most importantly, these build brand for the country, and if one looks at the global context, it is critical to create branding in today’s competitive age. Branding creates relevance and recall. Experience of emerging markets shows India did it in ITES/software, Taiwan in chips/semiconductors, China in hardware manufacturing, etc. This enhances opportunities for sustained economic growth, investing into mass job creation, and meet the changing aspirations of its people. Pakistan already has competencies in textiles, home furnishings, primary products etc. But it needs more to achieve the economic magnitude required for a country its size.
Below are six areas where I think the country can convincingly build competitive advantage. It has already gained ground in some of them. But I think it can break even deeper ground globally if it invests into the talent/capital/regulations to build its competitive expertise further, and emerge as a country of initial-recall in them. I have briefly touched upon the basic rationale and challenges for each. Some are with an export-orientation since the domestic market cannot always consume the entire capacity. Also, importance of export earnings cannot be overemphasized for reducing deficits in public finances. However, the country needs to remember it is not alone in competing for these sectors in the global arena. A number of countries are competing, and already have a headstart. But that does not reduce the potential for Pakistan in any way, since the underlying rationale for it is strong enough. It just needs to work to bring the same value to the table at a competitive cost.
‘Global Offshoring’ is a new-age sector employing many in their 20s/30s age group in many emerging markets. Global offshoring typically operates in a value-chain evolution in any country. It starts from business process outsourcing activities. This employs mass and the client’s main objective is cost reduction. Once the comfort factor deepens with the deliverable consistency and talent quality, it moves to the next stage of the value chain – knowledge process outsourcing activities. This employs specialists and the client’s main objective is intellect replacement. India’s offshoring sector has gone through this evolution, as have Chile and Poland. The Philippines has entered the BPO space, and it evolves similarly. Most South Asian countries have the ingredients for gaining global market share – English language command, a strong schooling/university system thanks to the British colonial legacy, ‘intelligent’ graduates across disciplines who have done well globally and a very young population willing to adapt, learn and put in the long hours. For the BPO segment specifically, the region’s location is such that it can pitch to global clients both in the east and in the west due to minimum time lapse with either. Offshoring has led to huge campuses for captive centers and third-party centers in India, Chile, etc. It is a large scale employer of young population and the scale of investment made locally indicates long term commitments. A challenge to gain global market share is to showcase the capability of its local talent in the global arena, so that conviction builds in their quality. It needs to bring back some citizens from abroad, those who have experience working with the client firms, and hence can bring value to develop the sector back home. Another is the stability, as absence of attrition management strategies creates roadblocks to gain long-term contracts. Infrastructure demands are significant though, with the need to develop large properties around the talent-rich cities.
Pakistan’s ‘Cement’ story is well-recognized. Output of leading cement makers is globally certified, and is comparably cheaper than most other producers. Cement is also a key sector on the KSE. But exports have not picked to the fullest potential. The country has a supply of the key raw material – limestone, to ensure production capacity. On the demand side, construction is going guns-blazing in most developing countries. In India, it is estimated that about two-thirds of the buildings that will exist by 2030 are yet to come up. African nations like Ethiopia, Nigeria, Botswana and Kenya have seen construction activity pick up with improvement in their economies. In the Middle East, large-scale mixed use townships are coming up in Saudi Arabia, etc. The key challenge here is to break into new export markets in both cement and clinker products. This might need continued engagement with stakeholders in those target countries through bilaterals, trade-shows or partnerships. Cost competitiveness in the global market has to be maintained. There is not much one can do about tariff regulations on imports in other countries except bilateral negotiations/advocacy, given most countries produce cement. So it has to concentrate disproportionately to at least keep its local cost of production low, and reducing delivery turnaround by streamlining the corridors which transport the consignment to the ports.
Pakistan is already a key exporter in primary agro produce and some processed foods. Given the socio- economic evolution that typically happens in countries as their economies become larger, it can mean increasing demand for ‘Processed/Packaged Foods’. This is because as the economies become larger, it requires an increase in workforce and longer work-timings. If the experience of India and most other emerging markets shows anything, daily cooking is not practical with a working population comprising both men and women due to lack of time and lack of hands. But since the population is earning more, it is able to pay and willing to pay. Apart from longetivity, increasing awareness of hygiene is another factor. Packaged foods address hygiene better than the raw version. There might be a rationale to invest into further processing facilities given this would have a growing domestic market as its economy becomes larger, plus a major export market if costs remain competitive. Currently, most Asian department stores stock processed/packaged foods from Thailand, Malaysia, China etc. Pakistan already has a ready supply of raw products like meats, grains, fruits, etc, so can compete effectively with the incumbents. Production processes also evolve, as evidenced by the large-scale cattle farms in Argentina etc dedicated for meat produce. Most importantly, this sector addresses a major social objective. It is a major employer of women workforce, thus ensuring women contribute into the economic process and increasing household income. Skills are also easily developed, since the assembling and packaging process is not as complicated as some other manufacturing sectors.
The next area might sound unconventional, but I firmly believe that most people in the South Asian region have a creative and imaginative streak in them. Maybe it has come through heredity due to our centuries-old cultures, or maybe it has come as a ‘counter-force’ to take the mind away from the hardships our countries have faced historically. Whatever the reason, there seems a supply of creativity and imagination in this part of the world. Developing the ‘Animation and Graphics’ sector might be a way to channelize this talent productively. Thanks to increased proliferation of advertising and entertainment content, there is a big demand potential for both graphics and animation worldwide. Also, as the experience of evolving social structures in most large economies shows more children end up playing on games or watching TV content for entertainment, rather than playing outdoors. While this might not sound a healthy proposition, Pakistan might eventually also go the same way. Japan, Korea and India have developed hubs of production, whose content are viewed globally today. If Pakistan can produce excellent children’s content like Sim-Sim Humara, it can do in graphics and animation as well. Burqa Avenger series is an example. Increasing the manpower supply needs professional institutes dedicated to these disciplines, which churn out skilled professionals in designing, visualization, artwork, character modeling, etc. The inherent imagination and creativity will achieve the rest.
Despite resolving its electricity ‘circular debt’ conundrum, the country still faces energy challenges. Increase in economic activity will demand even more power. Prices of oil and natural gas imports will not become much cheaper, keeping the cost of producing electricity high. For a country with a large area and energy shortage, large-scale ‘Solar Farms’ connected to the national/provincial grids might address some of the shortfall. Solar photovoltaic panels are easily set up on tracts where real estate and agriculture development are not occurring. The main challenge is the panel cost, as it can make the per-unit electricity costly. However, as demand picks up with increasing acceptability of energy alternatives, the cost of panels can be estimated to move southwards. An example is of CFL bulbs in India, whose price reduced drastically in recent years as demand increased. Local factories of panels can also come up with improving visibility of the demand potential, creating further jobs and export opportunities. Panels are the main cost, as sunlight is ‘free’. Some of the cost incurred can be realized by staggered pricing for higher levels of electricity consumption per dwelling, though this is a sensitive issue. Owners of the identified tracts need to be compensated through leases. Earmarking such land parcels at the initial stage itself would help estimate the quantum of panels to be procured, and thus bargain for better pricing. Output can also be exported out to its neighbouring markets if the rationale and network exists.
Sending out ‘Instructors for English-language, Primary and Secondary Education’ might seem unconventional too, but there is a rationale. First, many countries have emerged from decades-long civil wars in recent years. Their middle-aged generation spent most of its time in a conflict zone and did not pick up education to that extent. Hence, the supply of instructors to teach their young generation is limited. Second, there are countries which are seeing growth now, but need to increase their qualified workforce to achieve the next level of growth. But education enrolments were not high in the past, hence the supply to teach increased number of students is limited. Third, there are countries where English speakers were limited, but are now focusing on this skill in today’s modern economic age. Examples of all the three cases abound across continents. In order to meet the supply of instructors, there might be potential to send out qualified instructors to those countries. The region has excellent educational institutions built from the British times, which are producing quality manpower in line with the British education system. Hence, supply is assured and of good quality. Such instructors might emerge as a key source of foreign remittances in coming years. They might be cost effective as compared to instructors from Western countries. For instance, a number of English instructors have moved to China from the West, but I am sure the cost of Asian instructors would be lower comparatively. The only reason why I am limiting the scope of instructors to schooling is because schooling content is more universal across countries, and this is the foundation which many countries are unable to fill in. Higher education can be the next stage.
In conclusion, I again stress that it is imperative for the economy to utilize its current improving climate by concentrating on areas of ‘competitive advantages’. It has to emerge as a country of initial-recall in the global market in those areas ahead of peers. Its businesses have to increase their visibility on global platforms like roadshows, tradeshows and forums. Developing areas of competitive advantage will help realize long-term mass employment generation, sustained economic growth, export earnings and build a brand for it in the global arena.
Image Courtesy: Wikipedia
Originally published here – The Asian Connections Newspaper / An economic imperative for Pakistan – Deepening sectors of “competitive advantage” on March 05, 2014