PAKISTAN'S TEXTILES INDUSTRY IS FRAYING AT THE EDGES

UNCLAS SECTION 01 OF 03 LAHORE 000207

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON BEXP BTIO EAGR EAID ECIN EIND ELAB ETRD
PGOV, PREL, PK
SUBJECT: PAKISTAN'S TEXTILES INDUSTRY IS FRAYING AT THE EDGES

REF: A. A. LAHORE 0014

B. B. ISLAMABAD 1901

C. C. ISLAMABAD 0229

D. D. 08 LAHORE 0291

E. E. 08 ISLAMABAD 2633


1. (SBU) Summary: Garments and textiles constitute the single
largest industrial sector in Pakistan, accounting for 40 percent
of all industrial employment and 8.5 percent of Gross Domestic
Product (GDP). While the industry has several globally
competitive firms, the bulk of the business is mired in
low-value added market segments and hampered by fragmentation
and fragile infrastructure. Decades of policy supported the
industry as an engine of job growth, but demand for labor is
intertwined with the sector's underlying weaknesses. Moreover,
the nation has become dangerously dependent on garment and
textile work. Structural change to make the industry more
competitive could idle tens of thousands of workers who
currently have few alternative employment options. Perpetuating
the status quo is also problematic, trapping the nation in a
cycle of unsustainable subsidies for low-value-added,
uncompetitive industry. The federal textile policy announced
August 13 acknowledged these problems but probably cannot fix
them. End Summary.

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FABRIC OF PAKISTAN'S INDUSTRIAL ECONOMY
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2. (U) The textile and garment industry is vital to Pakistan's
economy. According to government data, the sector represents
8.5 percent of GDP and generates roughly 50 percent of total
export value (down from over 58 percent last year). The
Ministry of Textiles claims that the industry accounts for 40
percent of industrial employment in the country, and provides
supplemental income to "more than ten million farming families."
(Note: Pakistan's Federal Bureau of Statistics (FBS) puts the
entire agriculture labor force at approximately 21.9 million on
6.7 million farms. Post previously estimated the number of
people engaged in textile-related labor to be roughly three
million, two-thirds of them in Punjab. (ref A) All Pakistan
Textile Mills Association leaders more recently put textile
employment at 2.5 to 2.6 million. End Note.)


3. (U) The top tier of Pakistan's textile and garment sector has
globally competitive businesses, such as Rupali Polyester, which
focus on high-tech synthetic fibers, and vertical integrators
like ChenOne Stores who do their own weaving, printing and
dyeing, knitting, design, production, and retailing. These
better firms are characterized by professional management,
global marketing capabilities, formal sector jobs, and larger
scale high-tech facilities that operate on self-generated
electricity supplies. Top textile unit owners and their bankers
report that this elite segment of the industry is faring
reasonably well, and their orders have been increasing.

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FRAYING AT THE EDGES: LOW VALUE-ADDITION AND UNCOMPETITIVE FIRMS
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4. (SBU) The very structure of the lower tier, on the other
hand, renders the industry vulnerable even when order books are
full. Much of Pakistan's textile sector is focused on low-cost
market segments such as yarn, basic clothing made from low grade
cotton, and cotton bed, bath, and table linens. Secretary for
Textiles Waqar Khan recently told Econoffs that Pakistan's
textile and garment industry averaged $1,000 of value addition
per bale of cotton, compared to $2,000 for India and $4,000 for
China. Pakistan's textile and garment sector is the third
largest consumer of raw cotton in the world, yet the country
ranks just twelfth in the value of its international textile and
garment trade. A recent USAID consultant's report found that
Pakistan's low-cost domestic cotton and inexpensive labor
enabled it to compete in lower value sectors. An Asian
Development Bank (ADB) analysis conducted in 2004 reached the
same conclusion, judging this characteristic of Pakistan's
textile sector "unfortunate," given global market trends and
increasing competition, especially from Pakistan's Asian

LAHORE 00000207 002 OF 003


neighbors. Finance Minister Shaukat Tarin observed that
Pakistan's textile industry was competing on price, and it would
eventually lose.


5. (SBU) Marginal small and medium-sized enterprises comprise
much of this lower tier, facing a lack of access to or misuse of
capital and dependence on informal labor and feeble power and
transportation systems. A 2007 government of Pakistan report
found that more than 98 percent of the country's 305,000 garment
sector sewing machines and 87 percent of Pakistan's 259,000
looms were in cottage or small-scale production units. Only the
spinning segment is consolidated in large-scale manufacturing
enterprises. In both private and public settings, Finance
Minister Tarin has lamented the industry's fragmentation and
resulting lack of transparency and competitiveness. Informal
employment is common in all non-farm industries in Pakistan,
averaging 73 percent according to the FBS. Family control of
textile firms often leads to weak professional management and
murky corporate governance, say industry observers.
Piece-workers are typically organized into loose labor
organizations headed by brokers whose compensation is linked
more to the number of jobs they manage than the productivity of
the labor. Workers in all subsectors have resisted technology
upgrades that would lead to job losses.

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WRAPPED IN GOVERNMENT SUPPORTS
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6. (SBU) As Anjum Ahmad, private sector development expert at
the World Bank put it, Pakistan's textile and garment industry
has "always lived on subsidies. Always." The sector represents
8.5 percent of GDP, but Federal Bureau of Revenue (FBR) data
show that it contributed less than one percent of combined gross
sales, customs, and excise tax payments to the government in
fiscal year (FY) 2007-2008. The sector's net tax contribution
is even lower, as it receives tax refunds for "duty drawbacks"
on imported content, such as high quality cotton, that is
re-exported in finished goods. In FY 2004-2005, the last year
before Pakistan implemented a zero duty rating scheme for part
of the industry, garment and textile units collected $438
million in tax rebates, 79 percent of the national total.
Previous governments have subsidized the sector's research and
development, offered low cost financing for both and capital
improvements and regular operations, restructured or forgiven
industry bank debt, and provided labor force training.

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NO ALTERNATIVE TO TEXTILES TO CUSHION THE ECONOMY
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7. (U) Perhaps the largest problem with the textile sector is
the lack of existing alternatives, a point the Ministry of
Commerce makes frequently and which the recently-adopted trade
policy seeks to address (ref B). Harvard Economist Ricardo
Hausmann explained in a recent (still unpublished) ADB report
that between 1975 and 2000, Pakistan did not make any
significant leaps into new industrial export sectors. As a
result, Pakistan is dangerously dependent on garments and
textiles, where China, India, Bangladesh, Sri Lanka, Indonesia,
Thailand, Korea, Hong Kong and others all have comparative
advantages over Pakistan ranging from cheaper labor and broader
market access, to more modern equipment, better management, and
superior quality control. An earlier ADB analysis noted that
Pakistan would have to take serious steps in order to
significant expand its share of a declining and fiercely
competitive market for cheap fabrics and finished products. The
industry must change to remain competitive, and will probably
shrink as a result. The fear is that restructuring could idle
hundreds of thousands of workers with few other job prospects.


8. (U) Farm households and female labor are particularly
vulnerable in the event of structural changes in textiles and
garments. Decades of industrial development policy focused on
the textile sector, in part because it was labor-intensive, and
because some activities in the value chain such as stitching
could be done by laborers working at home. For most women in

LAHORE 00000207 003 OF 003


conservative rural areas, cottage industry is one of the very
few socially acceptable employment options, and garment work
became a mainstay of diversifying farm household incomes.
(Note: FBS estimates the female labor force participation rate
in Pakistan as a whole to be just 26.3 percent, roughly half the
rate for men, and most of that is in farm or home-service labor.
End Note.)

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COMMENT: OPPORTUNITY IN TEXTILE AND GARMENTS INDUSTRY IS WEARING
THIN
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9. (SBU) Comment: While the upper echelon of Pakistan's textile
industry has a bright future, the lower layers need systemic
reforms to remain globally competitive. Pakistan's advantages
in cheap labor and cotton should not remain crutches to prop up
structural weaknesses. Cotton is cheap because it is of low
quality, and labor is cheap because of the absence of other
industrial employment, particularly for women. The government
cannot afford ever more subsidies to support this large but
increasingly dysfunctional part of the economy. The Textile
Minister understands the structural weaknesses of the sector and
outlined many of them when introducing the new national textile
policy. Septel will assess the potential for Pakistan's textile
policy to achieve meaningful change.


10. (U) Note: This cable is a joint production of Embassy
Islamabad and Consulate General Lahore. End Note.
CONROY