VZCZCXRO5602
OO RUEHLH RUEHPW
DE RUEHLH #0207/01 3050914
ZNR UUUUU ZZH
O 010914Z NOV 09
FM AMCONSUL LAHORE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4210
INFO RUEHIL/AMEMBASSY ISLAMABAD IMMEDIATE 4906
RUEHKP/AMCONSUL KARACHI PRIORITY 2168
RUEHPW/AMCONSUL PESHAWAR PRIORITY 1848
RUEHBUL/AMEMBASSY KABUL IMMEDIATE 0511
RUEHLO/AMEMBASSY LONDON PRIORITY 0214
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 0891
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RHEHAAA/NSC WASHINGTON DC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RUEKJCS/SECDEF WASHDC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHLH/AMCONSUL LAHORE 5369

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. 
 
- - - 
FABRIC OF PAKISTAN'S INDUSTRIAL ECONOMY 
- - - 
 
¶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. 
 
- - - 
FRAYING AT THE EDGES: LOW VALUE-ADDITION AND UNCOMPETITIVE FIRMS 
- - - 
 
¶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. 
 
- - - 
WRAPPED IN GOVERNMENT SUPPORTS 
- - - 
 
¶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. 
 
- - - 
NO ALTERNATIVE TO TEXTILES TO CUSHION THE ECONOMY 
- - - 
 
¶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.) 
 
- - - 
COMMENT: OPPORTUNITY IN TEXTILE AND GARMENTS INDUSTRY IS WEARING 
THIN 
- - - 
 
¶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