The Implications Of Global Financial Crisis

Published Date: 02 Nov 2017

Introduction:

The Global Financial Crisis started on October 2008, which created two perceptions on its likely impact on the developing Asian countries; on one hand it was perceived that developing Asia, particularly China and some other countries, are now decoupled with the developed countries and would emerge as an alternative growth poles. The other school of thought believed that because of Globalization, this region has more dependence on trade and investment and mainly on exports; it was likely that this region would be highly affected by the crisis. However a mix outcome has been witnessed by the world, it does not resulted in decline of GDP but the growth of these countries have slowed (Chhibber J, Ghosh J, Palanivel T 2009).

The impact of financial crisis is not similar in all countries around the world, depending upon the level of difference between reliance on exports and positions within globalization. The ‘inner critical core’ (Green D, King R, Dawkins M 2010) countries namely China, Vietnam and Indonesia – has consolidated its production of textiles and garments into a pool of strategic suppliers’. The customers mainly rely for the most important share of their production, during ‘Bad times’ their orders may fall but their market share remain intact, in contrast to second line suppliers e.g. India, Pakistan, and Sri Lanka nad marginal suppliers like Caribbean Basin and Cambodia, which experience drops in both order and market share (Green D, King R, Dawkins M 2010).

The Textile and garments industry is one of the most globalized sectors of the world providing employment opportunities to more than 60 million people around the world (Forstater M 2007). Textile industry of Pakistan contributes almost 60% (USD 9.6 Billion) to the countries total exports and 46% to the total output i.e. 8.5% to the country’s GDP. Among Asian countries Pakistan is the 8th largest producer of textile products and contributing 38% to the total employment of the country, but its contribution in the international textile market is very marginal as compare to the neighbouring countries. China, India, Bangladesh, Vietnam and Indonesia are highly mechanized and equipped with technology to produce high quality, low priced textile products and increased supply in international market (Tahir M, Mughal K 2012).

The Global Financial crisis affected these countries minimally but its impact on Pakistan is more severe, contributing to the decline of textile industry other factors included law and order situation, Electricity and gas shortages, inflation, Political instability and stock exchange volatility etc. all resulted in movement of our industry to Bangladesh and other countries. The main aim of this study is to identify how factors associated with financial crisis had an impact on the textile industry of Pakistan, mainly from the point of view of experts who are religiously following the pre and post crisis period.

The purpose of this phenomenological study is to explore and understand the situation of Textile sector of Pakistan through obtaining the information from key participants in their respective area of knowledge and understanding of the phenomena under study. What they had experienced during the crisis and how they reacted to the situation, what steps they have been taking in order to improve the textile sectors performance. The experiences of people from the textile sector during the crucial period will allow us to have insights of the actual situation which prevailed at that point of time.

The main aim of this study is to identify how factors associated with global financial crisis have an impact on the textile sector of Pakistan. The phenomena that will be studied will include the era of financial crisis and simultaneously the crisis of textile industry of Pakistan and to identify the weak links. This study also aims to analyze the potential of productivity and investment of textile sector and its contribution in the earnings for the Government of Pakistan.

Literature Review:

Pakistan is the 8th largest producer of textile products and 4th largest producer of cotton in Asia, competing with China, India and Bangladesh as major rivals in the International Market. The Financial Crisis of 2008 has also affected the Developing Asia (Green D, King R, Dawkins M 2010), the inner circle including countries like China, Vietnam and Indonesia which were directly exporting value added products to United States and EU were more severely affected than those of outer circle countries namely, Pakistan, India and Bangladesh. Pakistan is the major exporter of raw material to the regional textile producing countries namely China, India and Bangladesh, therefore the impact of financial crisis is not severe in Pakistan as compare to those countries who are direct exporters of finished goods to the countries where the bubble burst. Textile sector of Pakistan is assumed to be the backbone of the economy, its contribution in the GDP is 8.5%, employing almost 30% of the country’s population of around 15 million people. $ 18 trillion is the annual volume of total world textile trade, which is growing at the rate of 2.5% per year, but contribution of Pakistan is less than 1% which is USD 9.6 billion a major source of foreign exchange earnings for the country.

The empirical research plays a very important role in this area of study Bhalhotra (1998, cited in Alam 2011) was the first who investigated the impact of 2008’s world financial crisis. Bhalhotra (1998) empirically determined the significant positive effects of capital stock, previous period’s employment and output change, and negative effects of man-hours and previous period wages on the employment. Alam (2011), in his research paper concluded that the financial crisis along with many other factors gave rise to the decline of textile industry of Pakistan including; energy crisis, disclosure by textile mills owner, secrecy of information due to tax avoidance all led to the crisis of textile industry. Pimple (2009) in his study on Global financial crisis concluded that, "We must be bold than ever in these times of crisis, when we are tempted to look inward, it is precisely the time when we must move pursuit of the common good to the top of the agenda. While recently we have heard much in the US about how problems on Wall Street are affecting innocent people on Main Street, we need to think more about those people around the world with no streets".

GEC in its study identified two major factors that were hardly hit by the financial crisis; first the developing countries which were having most globally integrated financial sectors, next came the impact on trade, as volumes and prices of commodities and manufactures collapsed across the globe. The report also concluded that, " The financial crisis of 2008 has had terrible results in rural areas, firstly unemployment has risen higher and higher as compare to previous crisis, secondly, salaries of people have either dropped or remained same and thirdly, salaries are not available on time to employees as companies are also facing hard time to release cash to employees and they cannot even afford to pay them. The impact of this crisis has been witnessed in healthcare sector as well: for example, one community member who is in need of surgery has had to postpone it because last month her husband’s salary didn’t arrive. And it is usually the women who are postponing treatment because of the impact of the crisis on household finances. Many women in our community healthcare scheme who have recently undergone mammography screening and been recommended to have surgery now cannot afford to pay for it – this is mostly because of the crisis."

Zhao et al., (2010) in his study on The Impact of Financial Crisis on Textile Trade Pattern between China and ASEAN "after the 2008 financial crisis the impact of the crisis on the trade pattern of textile industry as a whole and each of the 4 subfields (raw materials, textiles, clothing and textile machinery). G-L index and the export-import unit value ratio are analyzed with Brown-Mood median test, and the results show that the China-ASEAN trade pattern has not changed fundamentally". Gupta (2011) in the study of ADBI the Current State of Financial and Regulatory Frameworks in Asian Economies: The Case of India "The global crisis resulted in significant tightening in the market, equity, foreign exchange, and credit markets. The crisis was also transmitted to the real sector as output, employment, and capital formation were adversely affected. In particular, the SME sector was negatively impacted from a fall in demand and reduced access to credit." The impact of financial crisis has been witnessed in almost every part of the world; some countries that were not in direct trade relation with United States and Europe were not affected as compare to those who are direct suppliers of finished goods to these countries.

The research on impact of global financial crisis on textile sector of Pakistan has been very limited and this creates a scarce of literature available on this topic. Other than financial turmoil the political and socio-economic condition of the country is also not favorable this resulted in the continuous bad performance of textile sector although the government subsidies are more as compare to other sectors. Latif et al (2011) in their study showed that the financial crisis had negative impact on the trade growth; the exports fell mainly because of a drop in world trade prices. This has also resulted in import of vegetables by the government and now they are working on policy level to smooth out the effect of crisis.

Introduction to Pakistan Textile Sector and Its Performance:

Pakistan’s textile industry comprises of large scale organized and highly fragmented cottage/medium and small units including; Raw Cotton, Ginning, spinning, Knitting, printing and Dyeing & Apparels and made ups, these all small industries contribute to make up the overall textile sector. The macro-economic indicators of Pakistan economy shows downward trend since 2007, the pattern as followed by decline in foreign aid, foreign direct investments, and diminishing growth in exports, although there was upward trend of remittances to Pakistan but solely this factor could not contribute for the losses generated by other macro-economic factors.

The Economic Survey of 2012 reported that the GDP Growth of the country reported declining trend since 2006, Exports to GDP ratio also declined, foreign official aid and foreign direct investment also showed negative growth whereas Remittances improved and increased. As Alam 2011 discussed in his report that the macro-economic variables of Pakistan economy are not much hit by the crisis due to low integration of our economy in financial sector. The other factors that were indentified in his report included; power deficits in Pakistan, foreign investors, risk awareness along with global financial crisis led to significant fall in foreign direct investments. It is therefore concluded in his research that the global financial crisis along with other factors were responsible for the downward trend of textile sector. Now the textile sectors has started performing well and the movement of industries to Bangladesh has led the investor to produce textile products with low cost of production.

Research Methodology:

Sample:

Purposive sampling techniques is used for the research study, only relevant personnel from the research area on textile sector are contacted and interviewed in order to get the rich information Snowball sampling technique is also used to reach the research participants they were contacted with reference of other people. As this is a phenomenology study 3 interviews are done to get the maximum information for our study from the personnel who are working as a research analyst on textile sector of Pakistan as they are aware of the trends and impact of financial crisis on the textile sector.

Research Design:

The research design that is most suited for this research is Phenomenological research design, as the researcher’s main objective is to provide the readers with lived experiences of the experts from the Textile industry of Pakistan during the difficult phase of global financial crisis. In a phenomenology study the researcher transcends or suspects the past knowledge and experience to understand a phenomenon at a deeper level Merleau Ponty, (1956).Exploring the researchers view on textile sector how they look at the crisis and what structural changes they pose in reflection of their work that they were doing during the last 4–5 years. Phenomenological methods are particularly effective at bringing to the fore the experiences and perceptions of individuals from their own perspectives, and therefore at challenging structural or normative assumptions Lester, (1999).

Procedure:

After the approval and availability from the interviewees the interviews were conducted one person was from the State Bank of Pakistan working in Economic Policy Review Department as Assistant Director since last 04 years, he was working on external sector and had a good knowledge about the textile sector of Pakistan and the global financial crisis. The other interview was conducted online because of unavailability of the interviewer in Karachi; he is Mr. Rao Muhammad Tariq Jahangir, business relations officer at Iqbal Silk Mills, his views were also taken for the data collection purpose. One interview was tape recorded and the other was online both were transcribed verbatim. Participants are established persons in their field and were having useful and rich information on the topic which were posed to them. They cooperated with us even after the interview so that I may go back to them and check if the interviews were transcribed properly or not. Whatever I have written was in accordance with what they meant or should I need to make some changes in analysis part.

After informed consent each participant was asked to respond on what they knew about the Global Financial crisis and the textile sector of Pakistan, how they see the whole phenomenon and what measure they pose for improvement of performance of our textile industry. Background information of participants was obtained through the references with the help of whom we reached to our actual research participants.