IMPACT OF TRADE OPENNESS ON GDP

(A CASE STUDY OF PAKISTAN)

By Omer Qayyum Saqib Ullah Khan

Submitted to DR. Javed Iqbal

INTRODUCTION:

Trade is an important a!tor o e!onomi! "ro#th. Trade has been at !enter o ma$or poli!y debates over past our de!ades. %iterature su""ests that trade liberali&ation enhan!es e!onomi! "ro#th throu"h te!hnolo"i!al improvements. 'lassi!al e!onomist all ar"ued that !ountries "ain rom trade and #orld produ!tion in!reases as result o trade #hi!h is mentioned in !on!ept o !omparative advanta"e no#. (eo !lassi!al e!onomists on other hand #ere o the vie# that !ountries tend o spe!iali&e in those produ!ts #hi!h they have abundant resour!es in) this #ill equali&e the a!tor pri!es. Trade openness leads to removal o monopolies and helps in rea!hin" ne# mar*ets throu"h investment treaties and easy a!!ess to inan!ial mar*ets. + ter ,--.s /a*istan has e0perien!ed trade liberali&ation. These re orms in!lude less "overnment intervention1 removal o import quota1 import sur!har"es1 rationali&ation o tari stru!ture1 elimination o SRO1 removin" e0port

promotion and mar*et in ormation pro"rams1 lineari&ation o e0!han"e rate et!. Still /a*istan e0port "ro#th rate are only avera"e by international standards. I #e study the history o the developed !ountries li*e Indonesia1 Tai#an1 'hina1 US+ and UK it sho#s that they initially impose trade barrier and they develop their domesti! mar*et but a ter that they open their mar*et or orei"n !ompetition be!ause they *no# that in!rease in e i!ien!y and produ!tivity is only possible throu"h trade liberali&ation. The Ob$e!tive o our paper is to !he!* #hether restri!tion on imports should be imposed or not.

LITERATURE REVIEW:
Trade poli!y is more important a!tor in !ountry or e!onomi! development and "ro#th. In reality #orld trade is asso!iated trade barrier1 prote!tionism only e# !ountry have ree trade poli!y1 2on" Kon"1 even most developed !ountries use prote!tionism instrument to prote!t home industries di erent !ountries use trade restri!tion a!!ordin" to the !ir!umstan!es. The history o Indonesia #as remar*able1 ,-3. to ,-4. period #as notable in Indonesia e!onomi! history1 in ,-4. Indonesia had a!e very serious e!onomi! sho!* #hen the oil pri!e "oes do#n e0port and balan!e payment e e!ted very badly but Indonesia "ovt. have too* !on!rete step they in!reased the e0port o the non5oil and "as "ood. They have started 67 pro"ram to re orm the e!onomy in the same era they put same restri!tion on the import to prote!t the home industry but #hen their industries "re# up they a"ain remove the restri!tion on the import and Indonesia is the !ountry #ho rapid !han"e his poli!y and a"ain be!ome the import to e0port oriented !ountry. Small !ountries #ith in!omplete spe!iali&ation a ter trade #ere e0ploited. So they developed a stron" domesti! mar*et #ith !omplete spe!iali&ation and hen!e bene ited mu!h rom trade. In the +sian inan!ial !risis #hile there #ere si"ns o ree trade there #as little e ort to "et rid o dominan!e o developed !ountries in #orld trade. Small !ountries responded to !han"e in "lobal !ompetition by a!hievin" lon" term "ro#th by ultimate li tin" trade barriers reali&in" lon" term bene its are only a!hieved throu"h trade liberali&ation. Small !ountries !annot promote trade liberali&ation #ith removin" o trade barriers1 small !ountries #ith in!omplete spe!iation #ill be e0ploited. The early years o /a*istan e!onomy is a #ea* industrial base1 a"rarian e!onomy1 no in rastru!ture1 both e!onomi!ally and politi!al instability. 8irst ob$e!tives #as to stren"then

industrial base promote domesti! industry #ith hi"h tari

and non5tari

barrier. The period o

si0ty has hi"h "ro#th rate e0pansion o industrial base but trade barriers !annot redu!e in this period .In the ne0t de!ade industrial e0pansion has set ba!* due to nationali&ation. Trade liberali&ation poli!ies in /a*istan ta*e pla!e in ,-4.s.+vera"e tari rate have de!reases rom

99: in ,-4; to about ,9 per!ent. /a*istan adopts out#ard <orientation poli!ies to open up the e!onomy or trade and investment in early ,--.s. Due to Trade re orms ma0imum rate on imports is 66; per!ent in ,-43549 has !ome do#n to 6;: in 6..;. +vera"e tari rate #as 33: in ,--. #as redu!es to ,7.9: in 6..-. 'ustom duty slabs have also redu!es rom ,= to 7 in ,--35,--91 and import duties on 7... items #ere redu!ed. These poli!ies brou"ht redu!e anti e0port bias and promote !ompetitive and per orman!e base industry .In 6.,= /a*istan>s e!onomy still has lo# "ro#th trend. This is due to the ener"y shorta"es1 risin" "lobal !ommodity. /ri!es1 adverse e e!ts o loods o 6.,. and lo# produ!tivity o ?anu a!turin"

se!tor in /a*istan. But liberali&ation measures1 trade to @D/ ratio in the 6.,. #ere appro0imately the same as de!ade earlier. Quality o @overnan!e and mana"ement issues1 dispersal o responsibilities amon" implementin" a"en!ies and absen!e o quality mana"ement monitorin" and resolvin" poli!y issues are the main reasons o this trade poli!y ailure. There are some politi!al !onstraint #hi!h are barrier bet#een trade liberali&ation1 li*e bet#een /a*istan and India. The leaderships o both !ountries should reali&e that trade !an play a pivotal role in their national e!onomies and a!!elerate the rate o "ro#th and development. In the !onte0t o /a*istan and India1 trade may additionally result in durable pea!e1 redu!ed poverty o the people o South +sia are stru""lin" to li t up their standard o li e. It is noti!eable that there are no inan!ial !onstraints no "eo"raphi! restri!tions ontrade bet#een India and /a*istan it is

the politi!al "overnments o both !ountries #hi!h dis!oura"es trade and de!line in @D/ o !ountries.

trade li erali!ati"# a#d $d% $r"&t' i# Pa(i)ta# *r"+ ,--. till #"&
The economic liberalization programme means to undertake some policies that will accelerate development and the economic independence in the Pakistans history. The Pakistan economy was highly protected by trade barriers in early years in order to protect domestic industries from foreign competition. But Ayub khan took many steps for economic liberalization and introduced a high level of trade liberalization in the constitution of 1 !" and the #$ appreciate this economic liberalization and also liberalize their economy. After the war of 1 %1& Bhutto nationalizes all the sector of the economy which is also known as 'nationalization programme(. After imposing this programme all the liberalize sector of the economy came under govt ownership management. )n 1 %% *ia ul +a, took over the govt and introduce liberalization and islamization. +e privatized all the sector of the economy e-cept banking sector. )n this regime the private investment grew from ../ in 1 01 to 23/ in 1 0 . After the election of 1 1& 4awaz $harif was elected as prime minister of Pakistan and he started liberalization and privatization programme. Both these programmes were the pillar of 4awaz $harif economic policies. )n order to increase private saving and to achieve vision
'turning Pakistan into 5orea(& $harifs govt greatly move toward privatization& deregulation and liberalization of private sector. $harifs govt tried to finish the government subsidiaries and also tried to decrease the role of government in the economy and to increase the role of private sector in the economy. The private and foreign investment increased in the period of 1 1 to1 . and this led to the liberalization of foreign e-change and interest rate was substantially subsidies and energy prices come down near to its cost. )n the period of 1 . to 1 %& the economic growth was slow due to the Asian financial crises and the Pressler amendment of #$. )n this period foreign investment was low. )n response to these crises& Benazir Bhutto tight the control of some corporation and also privatized some industries. )n 1 . Benazir undertook some programme to achieve economic growth. But this programme also failed and economy was below the economic potential.

)n 1 % election& 4awaz $harif was elected as the prime minister of Pakistan. This govt again start their privatization liberalization policy and also make new ta-ation and monetary policy. All the policies start by the govt failed when 4awaz $harif ordered to test atomic bomb in response to )ndian e-plosion and it led the #4 to impose economic restriction on Pakistan. )n 6ctober 1 & the Pervaiz 7asharf take over the govt and make $haukat Aziz as finance 7inister and after some time he become was elected as prime minister. +e began his efforts for economic liberalization after his careful study. They start a good liberalization programme and took some enterprises in govet owned& such as banks and some were given to the private sector and this led to a high economic growth rate of / for the first time after 1 01.

FRAME WORK AND MET/ODOLOGY

Tre#d A#al4)i)

After 1

1 when trade liberalization and privatization policy was introduced by ppp 0

89P of country increases which supports our basic argument of paper that trade libelization leads to improvement in 89P of country. There was drop in 89P in 1 to "111 after Atomic blasts but this effect was negligible after "111 there was a sharp increase in 89P which was after :11 when Pakistan received inflow of Aid after taking part in war on terror as result Pakistan 8dp kept on increasing till "111

F0!han"e rate o /a*istan droped a ter atomi! blasts in ,--4 orei"n e0!han"e a!!ount #ere blo!*ed and e!onomi! san!tions #ere imposed #hi!h a"ain started stabili&in" in 6..,. There as sharp and sudden in!rease in e0!han"e rate and value o !urren!y a ter -G,, #hile /a*istan re!ived in lo# o dollars. + ter 6..9 due to devaluation o !urren!y our e0!han"e rate a"ain a!ed a #orse trend and this a"ain sho#ed due to devaluation o !urren!y as !ompared to dollars.

4=
23 21 .3 .1 "3 "1 13 11 3 1 1 03 1 1 1 3 "111 "113 "111 "113

Ahile loo*in" at trend o net e0ports in ,--. trade poli!y

s r o p ; t e 4

liberation

<ears

#as introdu!ed in

ppp era #hi!h sa# a dramati! in!rease in e0ports. %oo*in" at year ,--4 upto 6... pa*istan net e0ports rea!hed their lo#est due to la!* o e0ports and trade restri!tions a ter atomi! blasts. + ter 6.., trade opened and e0ports rose or /a*istan #hi!h rea!hed hi"hest in era o e!onomi! boom or /a*istan in 6..; .%oo*in" at "raph a"ain in 6..4 due to e!onomi! restri!tions /a*istan a!ed lo# net e0ports e0ports and trade balan!es #hi!h improved rom 6... on#ards