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The government has imposed a ban on imports of ‘luxury’ items to help boost the faltering economy. The move has been widely hailed with economic experts claiming it will save precious foreign reserves against importing unnecessary items, fix our current account deficit, and prop up the economy.
What is considered a ‘luxury’ item? In economics, a luxury item is a good for which demand increases more than the proportional increase in income. A luxury good or service is considered elite in society such as designer clothes or handbags, high-end cars, or club membership. People tend to purchase more as their wealth increases, unlike normal goods.
The government has not defined what exactly constitutes a ‘luxury’ item. Thus, every non-essential item which is not a basic necessity has been included under the list of prohibited items. This includes mobile phones, chocolates, cosmetics, crockery, home appliances, shoes, jams, jellies, juices, pasta, sunglasses, shaving items, and even pet food is treated as a ‘luxury’ item. The government aims to save $6 billion to stave off an imminent financial crisis.
The decision gives local companies an excellent opportunity to fill the void and fulfill the demand.
But are our Pakistani firms capable of living up to the mark and providing an alternative? Given that such items are not used by the wider public, will it really have a significant impact on the economy? Do we have any local substitutes for the banned products?
Many countries have banned imports to support the local industry. In 1973, India passed the Foreign Exchange Regulation Act (FERA) which imposed restriction on foreign exchange dealings. The law was passed at a time when reserves were very low and foreign exchange was a scarce commodity, and thus ownership was considered the government’s right.
Coca-Cola was India’s leading soft drink until 1977 and made huge money under full foreign equity. The foreign exchange act stated that foreign companies selling consumer goods must invest 40% of its equity in India with local associates. Coca-Cola resisted and stated it would invest 40% equity but would not allow local participation in administrative or technical matters. The Indian government instructed Coca-Cola to write a new plan or leave the country. In 1976, Indian PM Indira Gandhi was ousted after other political parties opposed her. The Janata party came to power in 1977 but it upheld the decision that Coca-Cola should accept the foreign exchange act or leave the country. Coke India left that year along with 50 other American companies.
This created a huge void in India’s soda industry and local competition was delighted by the new opportunity. Over the next decade, they started filling the market with substitute products. In 1993, Coca-Cola re-entered India after liberalization policies and modifications in the foreign exchange act. By then India’s indigenous brands Thums Up, Maaza and Limca were the leading soft drink brands with more than 200 production plants. Coca-Cola came with vengeance and soon acquired the popular brands which had developed in their absence.
Pakistan’s investment and corporate laws permit wholly-owned subsidiaries with 100 percent foreign equity in all sectors. In India, foreign companies are only given ownership after 50 percent equity in local associates. This is why Walmart, one of the largest US retail chains, faced stiff resistance entering India and operated with home-grown rival Flipkart until fully acquiring it.
Retail giant Amazon is also facing challenges in e-commerce supremacy in India. It faces legal battles, cut-throat competition, changing regulatory landscape, and the government’s push to promote local businesses. Jeff Bezos received a cold shoulder on this trip two years ago and announcement of $5 billion investment received a lukewarm response. The world’s largest company is also struggling to gain a foothold in Asia’s third-largest economy.
Pakistani companies have been unable to provide substitutes for foreign products. The import ban will restrict competitiveness and prevent productivity and quality from improving. Although it will benefit domestic production, it will also promote smuggling and drive prices even higher. The poor will not benefit as they are not consumers of luxury items while the elite will find a way around it.
The case of Nigeria may be important to highlight here. The Nigerian government uses food import bans to protect domestic producers and dependence on imports. Such policies have had a negative impact on consumers due to higher prices. Households spent 70 percent of their income on food and about 13 percent of the budget is devoted to products subject to import bans. This leaves the poor vulnerable to such trade policies and eliminating import bans is estimated to reduce poverty rates.
Pakistan’s government decision will short-term gains to fend off a financial crisis. Without any increase in domestic production and patronizing local firms, it is unlikely to make a long-term economic impact. It will also take years or perhaps decades before our firms will fill the gap like India where even the world’s largest firms have struggled to enter and local firms have grown into behemoths.
