The Mango Crowd
(This is the EIGHTH part of a series of weekly articles which will attempt to explore the advantages/disadvantages of Barter/ Countertrade as opposed to the liberal trade policy in vogue in Pakistan).
There is no doubt that the Countertrade and/or Barter process can be expensive. The Primary Aim for the country’s planners will be to keep the costs down. In order to analyse how we can reduce the effects of the MARK-UPs on the C&F prices, we have to undertake a review of the various trading options available to us under Countertrade and/or Barter.
A study of the import requirements and the suppliers will give us an opportunity to suggest ways of linkage, adduced to the minimum cost.
Our main import needs other than crude oil (which we hope to find) and edible oils (which we are trying to produce e.g. Sunflower cultivation) are machinery and equipment. Despite the fact that we have a functioning Steel Mill and a wide technological base, we persist in liberal imports of machinery and equipment, most of which can be made in Pakistan. We pay a lot of lip-service to “TRANSFER OF TECHNOLOGY” but in actual practice do not give any protection to our industries. One has to look at our import bills for spares to understand what a vast amount of foreign exchange is lost in this manner. Pakistan must contract for OFF-SET purchases. The machinery and equipment that we import must be replaced by workshops making that machinery and equipment (and their spares) in Pakistan. We have a number of factories quite capable of doing the needful but their present machinery has to be upgraded and consolidated, to be effective. The availability of skilled manpower needs no elucidation. By insisting for OFFSET purchases, we will ensure that not only are we making provisions for balancing the foreign exchange bill but also manufacturing quality products, as it is most unlikely that our erstwhile suppliers will be happy to be re-imbursed with shoddy goods. It then becomes their vested interest to ensure quality manufacture from the machinery and equipment supplied by him, for the product (and spares thereof) of their design.
One other major reason for OFFSET purchases is that there is always a fair amount of commission buried in the price of machinery and equipment. Machinery and equipment carries with it between 15-20% of the FOB value in commissions/discounts, of which our erstwhile local agents may collect anything between 10-15%. What happens to the commissions is a long story but what really matters is that therein exists an opportunity for zero balancing by Pakistan. If a MARK-UP of 15% has to be included as the price for Countertrade, this need not be added to the price.
The cost of MARK-UP can be absorbed within the C&F price without making any waves. If we can achieve this aspect, we will be in a position to export our goods without defraying expenses into the export price by corresponding MARK-UPs in imports.
OFFSET is the ideal route but whenever machinery and equipment are involved, whether it be COUNTER PURCHASE or straight BARTER, the MARK-UP can be very easily submerged in the price. Even if a fair percentage is absorbed, it will make quite a difference.
However, to a certain select group of highway robbers, Countertrade will have no appeal whatsoever, as the premise discussed heretofore hits at that part of their anatomy where it really hurts, their wallets, as it cuts into their large commissions, not that anyone grudges them the amount, but not in foreign exchange.
Dr. Mahboobul Haq often regales us with the amount of government revenues lost in commissions and kickbacks. His figures indicate a cumulative loss of Pak Rs:20 billion. Whereas the figures take into account graft down the line, a fair percentage of this is in the form of commissions paid out by foreign Principals in foreign exchange. Instead of attempting to bring everyone to book, why should we not use the “PADDING” in the price to our advantage, by utilising it to boost our matching exports? Such an attempt will be opposed tooth and nail by the affected recalcitrants, whom we can call “the MANGO CROWD” for brevity, as it is with their rather unwilling cooperation that we can export our surplus mangoes, etc.
The MANGO CROWD will lead a comprehensive campaign which would have us believe that CT will be an expensive proposition, that there will be no additionality to exports, etc — all because CT provides the linkage that will ultimately eat into their commissions.
To give you a working scenario, take the example of a bus or a truck. When buses are sold into this country, they carry with it normally 10-12% for the agents as commission and 5-10% as provision for maintenance purposes. In this manner 15-22% is available in the price in one way or the other. Very easily, this may be converted to MARK-UP for Countertrade. However, this may seriously affect the agents who may thus be deprived of a major share of their commission.
Therefore, they will try to convince their Principals on the one hand to add the MARK-UP to the price and on the other hand their buyers that Countertrade would mean the MARK-UP has been added to the price. To compound this situation, the MANGO CROWD will be supported by those who are on their DOLE to further the contract. Since all this is mostly in the public sector, this may include a stellar range of bureaucrats, most of whom may not be recipients at all of the DOLE, but are genuinely influenced by the few black sheep among them who write (or approve) the “minutes”, etc and so ultimately surmise that CT is an expensive process, not benefiting Pakistan or the economy at all. We may include these recalcitrant bureaucrats (and not the honest, gullible ones) as charter members of the MANGO CROWD.
Now we see that the MANGO CROWD has real clout. What with the gnomes in the bureaucracy supporting Pakistan’s Barter partners, their INFLUENCE — LEVEL is alarming – and very effective. What would an honest, God fearing bureaucrat really do in the face of acute shortage of foreign exchange in the matter of purchase of a bus, say for the YELLOW DEVILs ridden city of Karachi?
a. Fix the price of the bus at a competitive level.
b. Knowing that there is a discount available in the price of the bus, he would utilise that to effect the CT.
c. Ensure that the bus is made in Pakistan by TRANSFER OF TECHNOLOGY, a strict deletion programme concerned with the engine, chassis, transmission, electrical harness, etc.
d. Ensure that the supplier has to OFFSET part of his sales by re-export of the buses (and spares thereof) to ensure quality of the product, the upholding of quality then becoming the suppliers vested interest.
If he could (or would) do the above, what all can the dedicated bureaucrat achieve?
a. Zero balancing of foreign exchange
b. Boost of exports through CT.
c. Provision of direct work for our manpower by in-country manufacture of buses.
d. By a deletion programme, helping the emergence of ancillary industries and thus more utilisation of labour.
e. The production of quality products through enforced TRANSFER OF TECHNOLOGY as the supplier has to perforce re-export part of the production in OFFSET purchase.
However, this directly affects the interest of the MANGO CROWD who cannot allow their dreams of riches fed by liberal, unchecked imports be lost in the industrialisation of our country.
There is a worthwhile saying pertaining to those who believe in eating mangoes only. However it is in this country’s interest to ensure that the MANGO CROWD does not get away with it.
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