The economic paradox of trade liberalisation

Trade Liberalisation in Pakistan: A Paradox Hindering Economic Growth

Trade liberalisation, intended to boost Pakistan's exports and integrate the country into the global economy, has paradoxically led to a surge in imports while leaving many industries unable to penetrate foreign markets. The reduction of tariffs and trade barriers has made imported goods more affordable and accessible, exacerbating structural weaknesses in domestic industries and creating significant challenges for economic growth.

The liberalisation process has left Pakistan grappling with increased imports, while protected domestic industries—long shielded by subsidies and tariffs—struggle to remain competitive. These industries are losing ground not only in foreign markets but also domestically, where imports outperform local goods in quality, price, and variety. This erosion of domestic market share and export potential reflects a broader failure to improve efficiency and adopt global best practices.

The Impact on Domestic Industries

Liberalisation has particularly affected sectors such as electronics, consumer goods, and machinery, where imported products dominate. Historically reliant on protectionist policies, local industries have been slow to innovate or modernise. With subsidies and tariffs reduced, these industries are ill-equipped to compete against higher-quality and more efficiently produced imports. This stagnation is compounded by high production costs, including energy, logistics, and regulatory burdens, which make domestic manufacturing less competitive.

The inability to produce value-added goods or meet international standards further limits Pakistan's export growth. Inefficient production systems, coupled with a lack of investment in technology and research, have stunted the development of competitive industries. The result is a widening trade deficit, declining manufacturing output, and increased dependency on foreign financing, all of which strain foreign exchange reserves and hinder economic stability.

Structural Weaknesses and Policy Failures

Pakistan's economic woes are rooted in corruption, weak institutions, and inconsistent policies. Political instability and poor infrastructure exacerbate these challenges, deterring investment and stifling industrial growth. Moreover, insufficient emphasis on education and skills development hampers workforce productivity, leaving local industries unable to capitalize on high-growth opportunities. Small and medium-sized enterprises (SMEs), critical to economic dynamism, receive little support, further limiting industrial diversification and innovation.

In contrast, countries like India and Bangladesh have effectively leveraged trade liberalisation to drive growth. India, which began liberalising in 1991, pursued strategic reforms that balanced foreign investment with domestic industrial development. By protecting key sectors until they were globally competitive and investing heavily in education, particularly STEM fields, India created a skilled workforce capable of supporting high-tech industries. Strong institutions and improved governance further enhanced its economic resilience.

Similarly, Bangladesh's liberalisation strategy, initiated in the early 1990s, focused on export-led growth. By prioritising the garment industry and implementing policies to support SMEs, Bangladesh created a thriving manufacturing sector. Investments in vocational training and special economic zones (SEZs) have enabled sustained industrial growth and export competitiveness.

The Way Forward for Pakistan

For Pakistan to address its economic challenges, comprehensive industrial policy reforms are essential. These should aim to transition domestic industries toward competitive, export-oriented models by focusing on sectors with high export potential, such as textiles, IT, and engineering goods. Key recommendations include:

1. Promoting Innovation and Technology: Encourage R&D and adopt modern technologies to improve efficiency and product quality.
2. Enhancing Infrastructure: Strengthen export-oriented infrastructure and streamline regulatory processes to facilitate trade.
3. Developing Workforce Skills: Expand skill development programs tailored to high-growth industries.
4. Supporting SMEs: Provide incentives and policy support to foster SME growth and diversification.
5. Ensuring Strategic Liberalisation: Protect critical sectors until they achieve competitiveness, while promoting export-oriented industries.

Without targeted reforms, the adverse effects of trade liberalisation combined with inefficient industries will continue to hinder Pakistan's economic growth. Learning from the strategic approaches of India and Bangladesh, Pakistan must adopt policies that balance liberalisation with support for domestic industries to achieve sustainable development.