Academic journal article The Lahore Journal of Economics

The Textiles and Garments Sector: Moving Up the Value Chain

Academic journal article The Lahore Journal of Economics

The Textiles and Garments Sector: Moving Up the Value Chain

Article excerpt

1. Introduction

The textiles and garments (T&G) sector accounts for 48 percent of Pakistan's total exports, 30 percent of value-added in large-scale manufacturing, and 40 percent of industrial employment (Table 1). The sector is expected to continue doing well, given that Pakistan was recently granted GSP-plus status by the European Union (EU), which has opened up a large market for the country's T&G exports. Furthermore, rising labor costs in China and the increasing technological sophistication of its manufactured exports are likely to reduce the Chinese share (about 40 percent in 2012) of the world garments market.1 This will create an opportunity for other T&G exporters, including Pakistan, to expand their share of the market.

Additionally, as incomes rise in the large, fast-growing economies of China and India, their demand for T&G will likely rise in tandem. This will further expand the sector's export potential for Pakistan if it builds on its close economic and political ties with the former and common overland border with the latter. Several recent developments thus point to the continued-even rising-importance of the T&G sector in expanding exports and employment in Pakistan over the next five to ten years. However, we argue that, for the sector to realize its potential, policies that shape the incentive structure facing the industry need to be realigned.

This paper is divided into five sections.2 Section 2 describes the structure of the T&G sector and recent trends in T&G exports. Section 3 discusses the problems and weaknesses of the garments sector, particularly those arising from the policy environment. Section 4 explores the ways in which many garments manufacturers have successfully overcome the problems associated with Pakistan's weak industrial environment. Section 5 summarizes the recent initiatives undertaken by the Punjab government, which has made the development of this sector a key element of its industrial policy. Section 6 concludes the study.

2. T&G Exports: Structure and Trends

Since independence in 1947, Pakistan has been a major producer of raw cotton: in 2012, it was the fourth largest producer, accounting for about 8 percent of the world's total cotton output (US Department of Agriculture, 2014). It is not surprising, therefore, that Pakistan has followed a cotton textiles-led industrialization strategy. The textiles chain in Pakistan consists of activities spanning cotton ginning, spinning, weaving, finished fabrics, textile made-ups (particularly towels and household linen), and garments (woven and knitted apparel). In the 1960s and 1970s, Pakistan also promoted the synthetic fiber industry by giving it fiscal incentives and a high level of protection.

Initially, the textiles-led strategy was very successful and Pakistan was among the fastest growing economies in the world in the 1960s. Except for a brief interregnum during the Bhutto government's nationalization drive and heavy industry push in the 1970s, textiles remained at the forefront of Pakistan's industrialization strategy through the 1990s. The results of this strategy are evident from the continuing importance of the T&G sector to the economy.

However, the industry's historical pattern of development and the resulting dominance of the spinning industry in textile policymaking as well as the presence of a highly protected synthetic fiber industry have become major constraints to the growth of the value-added components of the T&G sector since the 1990s. To some extent, this is evident from the differential performance of T&G exports in Pakistan and Bangladesh. In 2011, Bangladesh-which does not produce any cotton and had no cotton spinning mills at the time of its separation from Pakistan in 1971-had garments exports of almost US$ 20 billion, i.e., about two thirds more than Pakistan's total T&G exports that year. Although there are also other factors underlying this remarkable difference in the export performance of the two countries, we believe that the historical pattern of development of the industry has, in both cases, played an important role. …

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