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Globalization And Its Impact On Pakistan Economy Economics Essay

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Globalization is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology. This process has effects on the environment, on culture, on political systems, on economic development and prosperity, and on human physical well-being in societies around the world.

The proliferation of McDonald's restaurants around the world is an example of globalization; the fact that they adapt their menus to suit local tastes is an example of globalization (also known as internationalization), a combination of globalization and localization.

Globalization and its impact on Pakistan economy:

This study looks at Pakistan's experience in the light of the international experience and

Suggests key strategic steps that are necessary for Pakistan to maximize its growth and

Poverty reduction benefits from globalization.

The whole process is predicated on increased efficiency arising out of the international

Competition. In order for the fruits of this process to be widely shared the poor have to

Constantly seek to improve their skills and human capital. This requires a set of specific

Interventions by the Government. Increasing competitiveness is at the heart of the whole

Process.

Competing in the globalized world requires new institutions and processes. It requires a

New "culture". In particular, the research requirements in order to stay competitive are

Becoming increasingly sophisticated. The need to build awareness and consensus also

Requires policy support. The study identifies the different areas for Government policy

Support

The study identifies in particular the need to have in place specific social safety net

Policies in order to catch the marginalized because the process by definition produces

Winners and losers and the inability to protect the losers can not only increase the damage

From the process but also shatter national confidence and lead to a reversal towards

protectionism

Challenges and importance of globalization in Pakistan

As mentioned above, globalization, and more in particular economic integration, presents

Both opportunities and costs. Greater economic openness, foreign direct investment, and

transfer of technologies offer potential opportunities for economic growth. Free trade

Allows specialization between different regions, allowing them to produce according to

Their own comparative advantages; it also expands the consumption choices of citizens by

Providing increased opportunities to buy goods and services from other countries. In this

Respect, it is very important to keep in mind that international trade is not a zero-sum

Game where some countries are winners and others are losers. On the contrary, trade

Benefits all countries because it enhances the choices of the consumer and the quality of

Products. If competitive, it lowers prices and raises real wages. It is also worthwhile to

Underline that contrary to what is commonly believed, "countries are not in any degree in

economic competition with each other", or that "any of their major economic problems

can be attributed to failures to compete on world markets" (Krugman, 1994, p. 6)12. Firms

compete; countries do not. "If the European economy does well, it need not be at the

expense of the United States; indeed, if anything a successful European economy is likely

to help the U.S. economy by providing it with larger markets and selling it goods of

superior quality at lower prices" (ibid.). Moreover, the evidence is very strong that real

GDP growth is related mainly to domestic productivity growth, not to balance of trade or to productivity relative to competitors. "Even though world trade is larger than ever

before, national living standards are overwhelmingly determined by domestic factors

rather than by some competition for world markets" (ibid.). Trade is largely static, while

productivity, which is driven by technical change, is dynamic and for that reason is

primarily responsible for economic growth. Therefore, focusing on international

competitiveness may lead to unwise decisions on domestic, as well as foreign policies.

Opportunities:

Economic globalization has also provided opportunities for developing countries in that it

expands the size of their markets for export and attracts foreign capital, which aids

development. Foreign investment is conducive to a transfer of technologies and knowhow,

which increases productivity. Another positive effect of globalization is greater

competition among firms, which benefits consumers who have access to products at

increasingly lower prices. Those who gain most from free trade in both developed and

developing countries are very often the poorest since they can buy goods at more

affordable prices, and therefore have a higher standard of living. In this sense, free trade

can be seen as an indirect way to reduce poverty.

Unfortunately, until now developed countries have not lifted their protective barriers in

many crucial sectors for developing countries. In fact, while "integrating with the world

economy is a powerful vehicle for growth and poverty reduction in developing countries,

… it would be still more powerful if the rich countries further increased the openness of

their own economies" (Stern, 2000, p. 5)13. We should recognize that many sectors, like

textiles and agriculture, which could provide real new opportunities for developing

countries, have not been liberalized. Another area of great concern is related to

intellectual property rights, and the use of anti-dumping practices, which seem to

discriminate against producers in developing countries. Moreover, while it is true that

globalization carries many opportunities in its trail, it is also true that it has costs for

specific sectors of the population in countries that are integrating into the world economy.

Economic overview of Pakistan economy:

From modest beginnings, Pakistani economy has moved successfully to a low-inflation high-growth trajectory since 2000. The central bank has controlled inflation at around 3% per annum in recent years - a record since 1980.Over 1,081 patent applications were filed by non-resident Pakistanis in 2004 revealing a new-found confidence. Agriculture accounted for about 53% of GDP in 1947. While per-capita agricultural output has grown since then, it has been outpaced by the growth of the non-agricultural sectors, and the share of agriculture has dropped to roughly one-fifth of Pakistan's economy. In recent years, the country has seen rapid growth in industries (such as apparel, textiles, and cement) and services (such as telecommunications, transportation, advertising, and finance).

Pakistan's Experience with Globalization:

Pakistan liberalized its economy as part of the structural adjustment conditionality's of the IMF program and World Bank lending. Pakistan's expansion in trade has not been as spectacular as that of some of the fast globalizers. Pakistan's exports merchandize exports have not kept pace with that of the rest of the world.

Pakistan's experience with globalization between 1990 and 2002 has not been great. Pakistan's share in the world merchandize exports has fallen from 0.16 to 0.15. China's share in world merchandize exports went up from 1.80 to 5.04. Malaysia's share in world merchandize exports has increased from 0.85 to 1.44

Pakistan's Trade Sector:

Pakistani manufacturing sector was one of the highly protected

sectors among the developing countries through a combination of high external tariff structure

and quantitative restrictions. The level and dispersal of tariff rates have both been excessively

high historically. Reforms in the recent years have substantially reduced the maximum and

average tariff rates, narrowed the dispersal and removed quantitative restrictions to reduce the

anti-export bias, promote competitive and efficient industries and encourage investment in

industries in which Pakistan has a comparative advantage. The maximum rate of tariff which

was 225 % a decade ago has been gradually brought down and will be further reduced from

the present level of 30 percent to 25 percent effective July 2002. Similarly, the average tariff

rate has also declined significantly to 11 percent in 2000-01 from 51 percent a decade ago.

The on-going trade liberalization also includes elimination of Para tariffs, deregulation of

administrative controls, and simplification and rationalization of tariff structure by reducing

statutory rules and orders. The Government will also phase out Trade Related Investment

Measures in accordance with the agreement with WTO and will not introduce any quantitative

import restrictions beyond the standard restrictions related to security, health, public morals,

religious and cultural concerns. Legislation on anti-dumping and countervailing duties will be

used for safeguarding the interests of local industry against potential damage caused by

subsidized exports.

Exports of all goods are allowed except for a few items. Recently restrictions on the

main staple food of the country i.e. wheat have also been removed. There are no subsidies of

any kind for exports. But the growth of Pakistani exports in the 1990s has remained sluggish

and the country's share in world exports has in fact declined. The lack of diversification has

resulted in rising concentration indices during the 1990s and thus increased exposure to

market risk. Pakistan has just begun to diversify its export base and export markets. This will

insulate the country from shocks arising due to the price fluctuations or production shortfall in cotton or lower demand in the dominant market.

Exchange rate is now determined by market forces in the Inter-bank market and the

currency is floating free of any intervention by the Central Bank. All current account

transactions are fully convertible and the foreign exchange regime has been liberalized.

There is strong empirical evidence that the countries that have increased trade as a

share of GDP substantially over the past 20 years and opened up to trade have seen their

economic performance improve significantly and reduced poverty rates avoiding any

systematic increase in inequality. As Pakistan continues to pursue policies aimed at

maintenance of a market-based and competitive exchange rate, strengthening of foreign

exchange market, import liberalization and tariff reforms and export promotion measures

there is strong probability that Pakistan's prospects for exports in world markets will improve

allowing it to increase its market share.

GDP Growth Rate:

Pakistan's experience also shows that in the decade of 1990s, significant trade liberalization was accompanied by a steady decline in the GDP growth rate, from 6.1% in the 1980s to 4.5% in the 1990s. Similarly, wide-ranging policy changes and incentives to encourage foreign investment did not lead to any significant increase in investment, apart from larger investment in the private power sector in the mid-1990s in response to a very attractive incentive package. In fact, overall investment declined from about 19% of the GDP in 1989-90 to only 15% in 1999-2000. Even on the export front, the trade performance has not been satisfactory. Despite substantial reduction in tariff rates, removal of virtually all non-tariff barriers and successive devaluations of the currency (leading to an annual depreciation of about 10% in the exchange rate, from Rs 24 in 1990 to Rs. 60 per dollar in 2000), the growth in exports in the 1990s was only 4.5% per annum, compared to 19% in the 1970s and 8.5% in the 1980s.

Globalization And Re-Industrialization:

Originating from free-trade doctrine, some opinions claim that Pakistan, under globalization, should forget about possibilities of a new wave for industrialization altogether. Though controversial, the claim also argues that the East Asian 'Gang of Four' days are over, and globalization - meaning flow of foreign direct investment (FDI) and openness - will determine whether the country can industrialize or not.

Such arguments also advise that Pakistan should try to attract FDI through the policies of liberalization, deregulation, and privatization. Most importantly, the government has to be cut-to-size and be kept out of markets in the process.

However, on the opposite side, forceful voices originate from at least two quarters, which at a certain level are mutually supportive approaches to long-term economic development. Broadly speaking, one is new institutionalize political economy and the second is new growth and new trade theory.

The moral of the story is that industrialization under globalization for long-term economic development is too important an activity to be left to blind forces of FDI and openness.

All three sectors, first (government), second (business), and third (civil society) must work together towards achieving national development objectives and strengthen national institutions. Each sector can contribute a set of competitive advantages.

Growth in textile industry:

During the last two years, textile industry has invested heavily in balancing,

modernization and replacement and so far imported new machinery worth $ 1 billion. This

will certainly improve the productivity, quality of products and capital efficiency but equal

attention needs to be given to the training and up gradation of skills in textile industry at all

levels. The institutional infrastructure such as Textile University, Textile Institutes etc. does

already exist in the country but the quality, staffing, standards of instruction, curriculum and

its relevance to subsequent job requirement are the issues which need to be quickly resolved.

Employers should invest in on-the-job training and organize in-house courses in basic literacy

for those are illiterate as the pay-off from this investment will be quite substantial in form of

higher labor productivity and higher returns to the firms making such investments. Induction

level training and apprenticeship are the other tools which can help upgrade the quality of

manpower in textile industry.

Foreign Investment regime and Capital inflows:

The distinctive feature of the decade of 1990s that affected the pattern and volume of capital flows to developing countries was the shift from official development assistance (ODA) to private capital. This was facilitated both by a growing dissatisfaction among the donor countries with the effectiveness of aid and by international financial deregulation and removal of capital controls.

Although these flows have increased the risks to recipient countries in form of external volatility and also accentuated the contagion effect the net benefits to developing countries can be

maximized under the right policy environment. Open financial markets have been associated

with higher growth but not to the same extent as openness to trade. Annual FDI flows to

developing countries now amount to about three times the value of official flows. But the

share of Pakistan in total private capital flows to developing countries has in fact declined.

Pakistan has deregulated financial markets, introduced full convertibility on current

account and partial convertibility on capital market, is pursuing a market based flexible

exchange rate policy, and liberalized investment regime. Both foreign direct and portfolio

investment can flow in and out freely without any restrictions or prior approval. Remittances

and repatriation of profits, dividends and capital can be made automatically by the authorized dealers.

Human development:

Pakistan is a low wage, labor surplus economy. However, while wages in Pakistan are low by international standards they are not low relative to near neighbors, India and particularly Bangladesh. Furthermore actual cost competitiveness will be determined by productivity and allowance for differences in labor and capital productivity suggests that on average Pakistan may not be a lower cost location than its neighbors.

Information technology and Communications:

In developing countries such as Pakistan there is an additional reason for investment

in the IT related sectors and particularly in IT education. The changing demographics in the

OECD countries along with rapid technological changes in IT and communications have

raised the demand for skilled professional workers from developing countries. India and

Israel have been supplying such workers in large numbers to the United States and more

recently to the EU countries. Pakistan has entered in this field late and is beginning to put its

act together.

The Government has allowed a host of incentives for the growth of software exports

and IT-enabled services. Private sector has expanded IT educational services significantly.

The present base is too small and thus it will take several years of dedicated quality work,

enterprise and marketing for making Pakistan IT industry and Pakistani IT personnel familiar

brand in the U.S. and European markets.

Findings:

In my all survey, I find that how globalization has changed the economic sector of Pakistan

In introduction I explain that the starting of free trade in world provide Pakistan a big opportunity to expand their businesses internationally.

Globalization helps in reducing poverty in country. Also it leads to the growth of agriculture and textile industry. globalization bring changes in cultural and social behaviors in Pakistan.

Pakistan is facing challenges as arise competitive conditions. Pakistan industry has to compete with foreign industry, so require improvement in industry.

Trade sector is lead to growth because trade barriers are reduced by globalization.

Manufacturing industry is growing which is less in past now exports are more in manufacturing industry. Telecommunication industry is become a big part of economy also globalization in Pakistan leads to the human development.

Recommendations:

Pakistan trade is limited to few countries. It should expand its trade to the other countries as it has many resources which are helpful in producing different products which are traded by other developing and developed countries. Pakistan also need to make good relation with regional and with other developed countries so more barriers will be reduced. It also needs to provide good law enforcement. Investors should be provided protection.

Conclusion:

The level of Pakistan's trade and financial integration has increased during the nineties as it has opened up its economy and followed a more liberal trade regime. However, this level of integration is still far lower than that achieved by similar developing countries. . In spite of this, exports have registered an increase while imports have declined during this period. In past exports are mostly base on agriculture sector. No doubt still agriculture sector is god source of revenue generation for Pakistan A shift towards manufactured goods in the export basket can be observed but the export base continues to be concentrated in a few low value added items, namely textile and clothing products. In order to survive in this more competitive environment, Pakistan needs to restructure its textile industry on modern lines while emphasizing the quality of finished goods. In this regard, the government should implement international quality standards like ISO 9000 and ISO 14000 in the production of textile products.

The communication technology revolution also brings life in economy of Pakistan economy. Now this industry is growing fast and taking part in economic development.

However Pakistan need more foreign direct investment as it has different sectors which are required development.


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