Impact of the Textile Industry on Pakistans Economy

Impact of the Textile Industry on Pakistans Economy CHAPTER 1 The study investigated the effects of textile industry on the growth of economy of Pakistan before and after establishment of world trade organization, 1995. The aim of the study was to gain insight about the effects of textile industry on the growth of Pakistans economy. The reason for selecting the topic The effects of textile industry on the growth of economy of Pakistan before and after establishment of world trade organization, 1995 was to explore this topic in Pakistan that how our textile industry is directly affects our economy. Although there are many researches conducted just to explore that how Pakistans economy is affected before and after the establishment of world trade organization. Industry is considered as the basic element of any country especially textile industry contributes significantly to the countrys GDP (Gross domestic product), exports as well as employment. The textile industry is one of the most important sectors of Pakistan. It is, in fact, the backbone of the Pakistani economy. It has a total established spinning capacity of 1550 million kgs of yarn, weaving capacity of 4368 million square meters of fabric and finishing capacity of 4000 million square meters. The industry has a production capacity of 670 million units of garments, 400 million units of knitwear and 53 million kgs of towels. The industry has a total of 1221 units engaged in ginning and 442 units engaged in spinning. There are around 124 large units that undertake weaving and 425 small units. There are around 20600 power looms in operation in the industry. The industry also houses around 10 large finishing units and 625 small units. Pakistani textile industry has about 50 large and 2500 small garment manufacturing units. Moreover, it also houses around 600 knitwear-producing units and 400 towel-producing units. According to Dr. Mirza Ikhtiar Baig (2010) the current global situation of the textile industry and the share of the Pakistan in global textile industry is the main subject of our topic. The textile demand in the world increased massively in last few decades. The global share of the textile increase about 18$ trillion and it is expected to increase 6.5% in future year. China is known as the major exporter country of the textile goods in the world. The world wide textile export is around 400$ billion. The Asian Countries have the major share in global textile export .The share of the china is around 55$ billion, the share of the Hong Kong is around 38$ billion, the share of the Korea is around 35$ billion, the share of the Taiwan is around 16$ billion and the share of the Indonesia is around 9$ billion, India also emerged as the major exporter of textile goods. In case of Pakistan, Pakistan also emerged as the textile exporter in the world. Pakistan emerged as the major exporter of th e cotton and cotton yarn, Pakistan export the 30% of textile cotton yarn and 8% cotton fabric to the world. Pakistan total textile export is 7.4$ billion in 2002 which account the 1.2% share in the world textile export. Pakistan mostly exports the textile raw materials to the world and did not export the value added items, this is the main problem of Pakistan textile sector. Pakistan should learn from Bangladesh who imports the raw cotton from Pakistan and other countries and then made the value added items and export it to the world. If we want to increase our textile revenue then we focus on the value added items in future exports. 1: TEXTILE INDUSTRY IN Nationwide Financial System: Fabric visualization-2005 has been aimed at an open market, unique, market driven and vibrant textile sector, which is globally incorporated, worldwide spirited and fully equipped to abuse the opportunities shaped by Fabric goods are the vital individual necessities after then food. Textile sector in Pakistan playing the important role in the growth of our national economy, it has the big share in our GDP growth rate. It is playing the impotent role in our export sector, employment sector and investment sector. It has the major share in our foreign exchange earnings. It has the largest share in our manufacturing sector. Textile share in overall manufacturing is about 46%; foreign export earning is about 68% and 38% share in services sector. In spite of the governments efforts to diversify the exports sector and as well as industrial sector, the textiles sector of Pakistan still the backbone of industrial activity in the country. FABRIC VISUALIZATION 2005: According to survey (2005) Fabric visualization 2005 is a vision about the new techniques introduce in sector. The vision about the, free entry and exist, barrier free markets, concept of competitive markets, dynamic and innovative which is internationally integrated and fully equipped to exploit opportunities created by the Multi Fiber arrangement at international level. At present Pakistan hold the 8th position in Asian countries Pakistan can take the 5th or 4th position if Pakistan fully exploits the opportunities created by MFA. THE FUTURE AND DEVELOPMENT OF THE TEXTILE EXPORTS The development of the textile industry is heavily depending upon the GATT rounds which ultimately become the reason of the establishment of WTO in 1995. The main agenda of the GATT rounds is to obligation of quotas system, unilaterally, bilaterally, multilaterally in the textile sector. It means that there will be no quota on textile products. Pakistan is also the member of the GATT rounds and then after the member of the WTO and the benefits of the GATT rules. In GATT rounds and WTO, USA and EU was in favor of the some restriction on Chinas textile exports. Pakistan and India treated most favorite nation because both are the founding nations. 1.1.3. QUOTA NATIONS PART IN PSKISTANS TEXTILE EXPORTS USA 44.5% EU 50% CANADA 1.7% TURKEY 3.6% 1.1.4. STRENGTH AND LIMITATIONS OF PAKISTAN: The share of the textile sector of overall world export is around 6%, which is accounted nearly370$ billion. The share of the clothing goods is around 210$ billion and remaining the share of the yarn and raw cotton. In case of Pakistan, the textile sector has the major share in Pakistan export. The 60% to 70% export of the Pakistan is depend on the textile sector which is accounted nearly 7$billion in year 2002-2003.The share of the raw cotton and yarn is about 30% and share of the fabric is nearly 35% (Ayesha Fayyaz, 2010). 1: The 15 EU members countries are the highly developed countries of the world and they are the main importers of textile goods. On 1st may 2004 the ten others countries are also join the EU, these 10 newly members are comparatively less developed and more economical to compare with 15 countries thus EU companies relocate their units in those countries for cheap textile manufacturing and export more textile goods. The EU export increased and became 11% of the world textile export. 2. The EU members countries increase the employment level in this sector. Thats why they are more focus on development of this sector. The 2.5 to 3.5 million people are employed in this sector. 3. Presently another threat of Pakistani exporter is that if EU withdraws his 0% duty under EU GSP scheme, then Pakistani exporters face the damages in her expert volume. 4. In case of the USA more than one million people are employed in the textile sector. In USA there are thousands of companies who produce the textile goods. The companies mainly in South Carolina, North Carolina, Georgia, Virginia and state of Alabama. These state protested against the 0% duty on textile goods. After the establishment of WTO and Asian crises nearly 250 units shut down and more then two laces people lost their jobs. Thus in 2004-2005 the USA Government impose the quota with different percentage on textile goods. Composition of Quota Goods USA EU CANADA TURKEY TOTAL Fabric 69% 12.4% Quota free 2.2% 21.5% Garments 30% 18.4% 1.1% 0% 49.5% Made Up 7.6% 17.2% 0.6% 0% 25.4% Yarn Quota free 2.2% Quota free 1.4% 3.6% Total 44.6% 52.2% 1.7% 3.6% 100% At present USA will also concentrate on the high tech textile goods to compete the modern world. USA focuses on non-woven, particularly focus on the hygiene products like childrens diapers and wipes, feminine hygiene, adult incontinence and highly end fashion items, particularly for womens wear. USA and EU wants the better market access to their textile products and on the other hand they also want to implement the rules of the WTO on tariffs, quota and intellectual property rights. They also want to implement the rules which are mentioned in GATS and WTO like environmental conditions, laborers facilities, wage rate and tax collection system. Pakistani exporters will prepare to fight these challenges of the modern world. USA imposes safety measures on textile exports, which can also effect on Pakistan exports, but the Pakistani exporters having the chance to get the benefit from the quota restriction on China and Vietnam imposed by the USA in 2005 as cited in Dawn News the Economist Magazines (2000). Corporation in different sectors is key to success; if the Pakistan Government and the private sectors cooperate with each other it is beneficial for the Pakistan textile industry. The government should be encouraged of production of MMF synthetics, and the private sector should be encouraged the buffer stock scheme of cotton and stock pile schemes. The Government should reduce the duties on textile machinery and other equipments. The Pakistan Government should provide the facilities to the exporters to start the business. The cost of start new business in Pakistan is very high to compare with the regional countries so the Government, Ministry of Commerce and Stat Bank of Pakistan should take steps to facilitate the business man. The ministry of Commerce focuses on three weakest links in the textile like dying, marketing and ginning. The Government of Pakistan and State bank of Pakistan should provide loans to the exporters to expand her businesses and improve the quality of the goods at international standard. The interest rate on the loans must be low to compare with market. 1.1.5. RISE IN FABRIC EXPORTS MANUFACTURING IN PAK: In international market there sharp propaganda against the quality of the Pakistan textile products. Pakistan faced the challenges of the high quality and the competition with the regional countries. After the abolition of the textile quota from January 2005 Pakistan surprised the all competitive countries to increase its global share of exports and get additional foreign exchange. Pakistan also improve its quality of the textile products thats became the reason to earn extra revenue. According to The Nations Money magazine (2005) after the abolition of the quota free world trade on textile products the Pakistan textile sector earns 3.6$ billion through exporting textile products, which show the 10% growth over the corresponding period of the last year. The different textile experts having the opinion that the textile exports of the Pakistan is expected to increase 5$ billion during the first six months after the abolition of the quota regime (January June 2005). The total export of the year 2004- 2005 is expected to increase 8.5$ billion. In 11 months of year 2005 the textile industry of Pakistan earn 7.70$ billion worth of foreign exchange earnings, which show the significantly increase in the foreign exchange earnings to compare with the previous years. In May 2005 the textile exports of the Pakistan increase 830$ million as against 650$ million in April, its show the pleasant trend in textile sector of Pakistan. The Pakistani textile manufacturers are very optimistic in nature and want to increase the international share, and they have target to increase the exports around 10$ billion US dollars. The textile industry can achieve this target; if the industry is steadily increase its exports share in the international market. The Pakistani textile manufacturers claim that the textile products such as, yarn, fabrics, cloth and bed linen are the most competitive items in the world, the quality of these products are very fine to compare with other world. These items have a major share in our overall textile exports. They claim that the leading textile producers and the exporters of the world like China, Germany, Bangladesh, and Sri Lanka import these products from Pakistan and convert them into high fashion items and export the world. After few months of establishing the quota-free global trade of textile, the knitwear and readymade garment sectors in Pakistan faced a pressure, but now these two segments of the Pakistan textile industry also show improvement in manufacturing of the products. The other segments of the Pakistan textile like yarn, bed linen, clothing, are doing well before and after the new WTO regime. Since 1999 to 2005 a sizeable investment nearly 5$ billion to 6$ billion US dollars are invested in Pakistan, which have pleasant effects on local textile industry. There is huge investment in Pakistan textile industry; this investment developed the textile sector. The investment in the textile sector is divided between different segments of the industry. The spinning has made 46% of the total investment; the weaving sector has made 24%. Textile processing has made 12%, made-up 8%, knitwear and garments 5%and 5% invest in the synthetic textile sector. The textile industry of Pakistan is expected to receive investment more than 6$ billion US dollars by the year 2010 and this investment will increase the capacity and the quality of the products. According Tariq Mahmood Acting chairman all Pakistan mills association The USA imposed some restriction on Chinese textile products; this restriction is also beneficial for the Pakistan textile exporters. The EU and USA gives the bulk of the textile orders to the Pakistan because the Pakistan has the capacity to achieve the target on time. Presently the USA and Europe became the major market of Pakistan textile products, and Pakistan generates large amount of the revenue. . Soon after launching the quota-free international trade under the rules of WTO, Chinese started marketing their textile products vigorously in the USA, Europe and other major consumer countries of the world and wants to capture the local market. This behavior of the china badly damaged the local textile industry of the Europe and USA, and ultimately this became the reason of the trade war between china and EU, USA so the EU and USA wants to impose some restriction on textile products. For the last few days a tug of war started between china and USA on the issues of the revaluation of the Yuan (Chinese currency), Dumping, terrifies and this war between USA and China is beneficial for the Pakistan textile sector. The Tsunami factor had also become the reason of the development of the Pakistani textile industry, because Tsunami heavily damaged the textile industry of the Indonesia, India and Bangladesh. The re-location of the textile industry in EU and USA had also beneficial for the Pakistani textile exporters, because they mostly fulfils there textile needs from Pakistan. They import the different products from Pakistan and used it in her products. The textile industry of Pakistan had equipped itself at the international standard after the abolition of the quota system and imports the advanced textile machinery to improve the capacity and quality. The textile sector invest more than 4$billion US dollars in last four to five years, investment on the latest machinery, infrastructure, communication, expansion, manpower and designing. The industry believes that this investment in industry will comfortably meet the up comings challenges of the advanced world. Cotton is the basic need of the textile industry, and Pakistan is the leading producer of the cotton in the world. Pakistan producing the 12 to 14 million bales of the cotton annually. The Government of Pakistan should take step to promote the research on cotton which increases the production and the quality of the cotton; through research on cotton we can produce the disease free cotton. After the abolition of the quota system the textile industry has believe to need the 16 million bales of cotton annually, the 14 million of bales produce locally and 2 million of bales import from the other countries. If we focus on the research we can fulfils the need of textile industry, and also export the other countries. 1.1.6. Complication and Problems in Textile Investment Lack of road and rail network facilities in the country. Poor management by the different governmental agencies. Bad governance and poor law and order condition in the country (especially in Karachi and Khyber Pukhtunkhawah. Bad image of Pakistan portrayed by the international media and international agencies. Warnings, which are issued by the foreign countries to their citizens to stop travelling of Pakistan is also the big hurdle in Pakistan development. Pakistan is the member of the WTO and signs many international agreements like intellectual property rights and international arbitration agreements which enforce Pakistan to obey the rules. Poor communication facilities are also the major hurdle in Pakistan textile development. Corruption in Governmental department is also the major issue of the Pakistan development. Severe electricity shortfall in the country. Financial instability in the country which became the reason of the decrease in foreign investment. Our utility rates are too much high to compare with the regional countries. Our tax collection system is very weak, which also one of the main hurdle in our development. Energy crises in the country (crises in natural gas/ crises in the accessibility of petrol). The good quality soft water is not available for our textile sector (especially in Karachi). Negative impact of SROs culture. 1.2. MOTIVATION OF RESEARCH: There is a need to explore the factors influencing the overall productivity and development of the textile industry of Pakistan and the problems faced by the textile industry of Pakistan, so that it can help the policy makers to shape the different policies to tackle with the various issues of the textile industry, and it can only be done with the help of the research. There is a need to conduct study on this topic so that it can be beneficial for the individuals as well as the Pakistans economy. The issues faced by the textile industry at current need to be studied and can only be solved through proper policy implications. There is a need to explain the various factors affecting the textile industry of Pakistan so that the policy makers have an idea to explore the responsiveness of the textile industry due to current trade policies which will in turn help them to identify the different policy measures to enhance the textile industry in our country. 1.3. RESEARCH QUESTION: It is believed that the textile industry acts as the backbone of any economy, and the development and prosperity of the economy depends largely on the development of this sector. Here in this research, an attempt is made to study the effect of textile industry on the growth of the economy before and after the establishment of WTO (1995) from 1947 till current. The basic research question arises from the discussion is that whether the textile industry contributed positively towards economic growth in the country? The research tries to find out the accurate answers of this question by using econometric models. 1.4 RESEARCH OBJECTIVES: The textile industry acts as the backbone of any economy, and the development and prosperity of the economy depends largely on the development of this sector. This study was conducted how the textile industry is contributing significantly towards economic growth 1.4.1 HYPOTHESIS: H0 Textile industry does not directly related to the development of the economy. H1 Textile industry directly related to the development of the economy CHAPTER 2: BACKGROUND According to Dawn News the Economist Magazines (2008), in 1947 after self-rule, only two textile mills were working with 80,000 spindles and 3,000 looms. At that time our domestic need was 8 % only. 1950 The organized development of cotton textile mills started in the late 50s. In 1952 PIDC and in 1953 Vatika Textile Mill at Karachi was organized. 1960 By mid 60s about 180 units of textile bleaching, printing and processing units in Pakistan. A number of spinning units comprising of only 12,500 spindles were set up. Newly established mills were based upon imported technology but there was lack of technical staff and shortage of capitals. Pakistans textile industry has lost its relatively more prominent position of the 1960s and 1970s, and today holds a little over 2 per cent of the world market. Pakistan enjoyed a very dynamic performance in the 1960s, and was among the leading; underdeveloped countries that were emerging in the world cotton textile market. In fact, Pakistans record was quite envious, as between 1962 and 1970 it cornered over 11 per cent of the world market (Admin, 2010). 1970 During the era of 70-71 there were 113 textile units and the industry had 2,605 spindles and 30 thousands looms. After the separation of East Pakistan, Cotton Export Corporation of Pakistan was established this meant that most of the private sector was taken over by the state. The textile industry suffered heavy looses because the export cotton controlled by CEC (Cotton Export Corporation of Pakistan), and the import of machinery was made difficult due to shortages of foreign exchange (Admin, 2010). 1980 This phase brought a relief to the textile Industry of Pakistan. There was a rapid growth in spinning sector. Till 1980-81 spinning continued to expand to 4033 thousand spindles in 203 spinning units, and working capacity amounted to 2833 thousand spindles. The textile sector holds a very important position in Pakistans economy in terms of employment value added and exports. It has the highest manufacturing value added for any industry amounting to 17.5 per cent. Similarly, about one-third of the entire manufactured employment is in the textile sector. In terms of exports, approximately 30 per cent of Pakistans total export came from cotton textiles in 1990/1, up from 20 per cent in 1982-3. Cotton yarns contribution to exports increased from 10 in 1982 to 18 percent in 1990. 1990 Machinery for producing garments and made-up was also freed from import duty. As a result, a huge expansion in the spinning sector took place in the first five years of the 1990s. World demand for good quality, wide width fabrics grew and replacement and a modernization process started. With these developments, production and export value-added items such as bed-sheets and home furnishing started. Structural changes with the replacement of outdated machinery and modernization in the industry still continued in view of world competition. In 1991-92 Pakistan produced a record high crop of 12.8 million bales.1993 to 1998; Pakistan recorded a development of 101% per year in cloth manufacture while its position is third after China and India in the world wide yarn manufacturing. The place of Pakistans textile manufacturing relatively persist and further following the full execution of WTO (World Trade Organization) contract from 2005 beyond when a period of open trade will establish internationally. In 2000-2001 Pakistans Cotton production and consumption was almost equal around 10.45 million bales (Arshiya Fayyaz, 2008). World Trade Organization and textile industry: World Trade Organization (WTO) a foreign organization which support deal between member countries, look after nationwide trade contracts and resolves disputes when they arise (Business dictionary, 2010). According to Kimberly Amadeo, the WTO (World Trade Organization) is a set where associate administration goes, to try to solve the trade issues they face with one another. At its heart are the WTO agreements, discussed and noticed by the volume of the worlds dealing states. But the WTO is not just about relaxing trade, but in some conditions its rules hold up trade blockade for example to defend clients, avoid the increase of virus or look after the atmosphere. World Trade Organizations (WTO) Impact on Textile Industry in Pakistan: According to Jabir Rafique The contract on fabric and clothes, which were ingredient of the Uruguay Round trade discussions; aim to abolish the component of inequity in textile and clothing. An agreement on textile and clothing (ATC) actually does is to give marketplace entrà ©e to developing nations and does these throughout two belongings. A: amalgamation B: development tariff We should not observe the scientific feature of ATC (agreements on textile and clothing) now, but focus on what is happening since January 1, 2005. There is a crowd of questions that would turn into greatly important for trade in textiles and apparel. Pakistans exports of textiles and apparel are probable to rise 8-billion us dollars score in 2003-04 to previous years about US$7-billion exports, current sky-scraping prices of yarn not withstanding. Pakistan will face equally intimidation and opportunities from January 1, 2005. The fundamental problem which will crash exports in 2004, but not yet determined are: Whether the EU (European Union) and U.S.A. will permit carry-forward in 2004 as required by all rising nations. Whether delivery received January 1, 2005 beyond will be free irrespective of the year of delivery or may be, for these, suitable quota permit could be essential, or these supplies may be drove back or taken away by customs. How the EU make a strategy to contract with free activities of supplies from the 10 fresh associate nations which will connect the Europe union on May 1, 2004. Pakistan by no means is capable to completely use part available to it; usually, 25% of the quotas stay unutilized. The proportion consumption of quotas remains unutilized. In 2002, an entirety amount of 4,646 million cube meters be offered to Pakistan from the listed nations. An amount of 1,147 million stays unutilized. Per unit price obtain in 2002; the unutilized value explains US$600 million (Osaka Senken, 2004). Cotton and fabrics have the greatest industrialized base. In the previous years, the section of knitwear, blanket, dry items and chosen stuff of handy clothes have shown an significant increasing trend in exports. Though, the Pakistani cloth mill is comparatively weak in artificial fiber goods, natural fiber clothes and fancy clothing. The impact of complete addition is probable to hit this sector hard. Because of back-loading, the limitations would stay in place till the end of 2004. As a result, no alteration era would be offered to the manufacturing. This unexpected swap from a limited to a open atmosphere would surely attach to the alteration difficulties of untrained units (Osaka Senken, 2004). The further influential feature since January 1, 2005 will be: Skills on which there has not been adequate center until now. The customary vision of negotiators, so as to contemptible employment and a rich delivery of yarn is not true any longer. After that is user flavor. Requirement for cotton and for fabric and clothing is common. So we should develop a spirited benefit on the goods and services that we had a relatively gain on it. While there will be no restrictions on exports; however rivalry from China and the Asian tigers with apparent additions in the non-tariff fence should be kept in view. Uruguay round was established because it was thought that in year 2005 this round would be a round to end other rounds. EU, Japan and other countries made a lobby to initiate a new round. In November 2001, 4th WTO Ministerial meeting, the Doha expansion program, basically the start of a new polygonal trade negotiation round was certified. Fresh problems were raised, and these problems were discussed in 2005. The 5th Ministerial Conference commence in Cancum, Mexico gave the notion that the urbanized world required to eat its cake and have it too. On the other hand the unpleasant act, skill, transformation, important reserves, marketplace, particular tax talks and particular local provision should be followed. To sum up, the Pakistani cloth manufacturing should not relay on usual marketplace, models and conventional ways, because there is no assurance that the offered model will persist as it is.. CHAPTER 3:  LITERATURE REVIEW Dr. Noor Ahmed Mammon, (2010) analyzed the establishment and development of the denim sub sector. According to him, the weaving part in Pakistan generally is paying intense attention to the significant success of the denim sub sector. The clothing industry of Pakistan openly benefits from the latest developments in the denim adding up advanced price to the textile formed in Pakistan. The Denim area in Pakistan still much smaller in terms of scale is leading the system for the whole industry. Aftab A Khan Mehreen Khan (2010) examine the challenges of this decades, and examine that Pakistan faces the toughest challenges in this decades. According to their research the internal condition of Pakistan is very bad and the exporters face the huge challenges. The exporters of Pakistan face crises of electricity breakdown, Shortfall of Gas, high inflation rate, political instability, terrorism, high interest rate, and problem of the foreign visas. According to their report the Government of Pakistan should take steps to solve these problems because textile industry is backbone of our exports. Jodie Keane et al, (2008) examine the job of fabric and clothing industry in enlargement and expansion strategies in developing countries. They propose that textile and clothing industry are significant in economic and social conditions, in the short-run by providing income, jobs, particularly for women, and foreign exchange receipts and in the long-run by providing countries the chance for continued economic growth. According to them, the potential of the fabric and clothing industry to contribute to long-run expansion and progress will depend not only on the characteristics of the investor, but also on the worth as well as efficiency of government policies and institutions in rising countries to put up on this deal. Dr. A. Ali Mohammad Munir (2008) analyzed the Pakistans textile export in international market. They analyze that the share of the bed wear, towels and knitwear has increased over the last six to seven years and they became the major export of our textile sector. The share of the other textile items like hosiery, denim and other textile items remained inactive and changed marginally. The study also tell that after the quota free regime in textile the competition increased too much so Pakistan need to focus on the quality of the product. Afia Malik, (2004) examines the situation of Pakistan textile industry after the establishment of WTO (1995). After the establishment of WTO in 1995 the trade