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CPEC 2018 Summit: Manufacturing - Key to unlocked growth

By Shaukat Tarin

For Shaukat Tarin, the heart of the CPEC opportunity lies in the SEZ; Only by expanding manufacturing output will Pakistan register sustained growth beyond the 6pc mark.

CPEC is a subject that has the potential to take Pakistan’s economy to a significantly higher stage of development and bring unparalleled benefits to China. Not since the Marshall Plan post-WWII has there been an initiative taken by an individual country to rejuvenate the global economy.

As we all know, CPEC is part of the One Belt One Road (OBOR) initiative that envisions connectivity between and within Asia and Europe, and aims at addressing the Infrastructure Gap that has kept this vast region below its potential.

CPEC is a collection of infrastructure projects that are underway across the country and are valued at over US$60bn – up from the originally envisaged US$46bn.

SCALE OF INVESTMENT

From a broad perspective, this level and this quality of foreign investment is impossible to shore up for any country.

I say this because this investment is in Infrastructure as opposed to Industry; Roads & Highways, Railways, Port, Power Plants, and Special Economic Zones.

I also say this because it is integrated under a master plan – as opposed to being evolutionary in nature, as has been the case with most countries.

Under tradition economic models in market-driven and democratically-led countries, these vital investments are made over an extended period of time by elected governments. They pave the way for the private sector to come in and set up shops, factories and industries based on competitive advantage. Benefits accrue but the infrastructure is not always linked to maximise synergies and advantages.

For a host of reasons we are well aware of, Pakistan has not been able to allocate sufficient resources for infrastructure development. This has not only limited economic growth but has restricted the country to a producer of very basic products.

CPEC offers a way to leap-frog into a modern future. A number of CPEC projects are well underway and should be fully commissioned within the next five years.

This speed of execution is unprecedented in our part of the world and significantly shortens the time to economic revival and broad-based growth.

Despite the delays – which quite frankly were expected given the consensus building and administrative support required to deal with the scale and impact of these projects – Pakistan will have a fully functional port, which a deep draft and a geostrategic location; road and rail linkages that connect its southern tip to western China; over 10,000MWs of incremental electricity; world class economic zones; and, of course, much more in the foreseeable future. This is nothing short of a fast track economic revolution!

CPEC PHASE 2

Alongside this basic infrastructure, CPEC will be setting up special economic zones that would include Rashakai in Khyber Pakhtunkhwa (KP), Dhabeji in Sindh, Bostan in Balochistan, Allama Iqbal Industrial City in Faisalabad, Punjab, ICT in Islamabad, SEZ Mirpur in Azad Jammu and Kashmir (AJK), Mohmand Marble City, and Moqpondass SEZ in Gilgit-Baltistan.

This is really where the heart of our opportunity lies.

A lot is being said about premature de-industrialisation in Pakistan, in common with other developing countries. The implications of this are as follows:

As per capita income expands beyond lower-middle income levels, demand for manufactured goods grows even faster than GDP, in line with the expansion of the middle class (autos/electric appliances etc).

If manufacturing investment and output has not been growing faster than GDP in previous years, domestic production will not be able to meet the higher demand. High demand will then result in rising imports and balance of payment (BOP) pressures.

As a consequence, policy will need to be put in place to curb ‘excess’ demand, which will then slow down, or even reverse, the rate of GDP growth. This has been true for Pakistan for at least a couple of decades now. We seem to be ‘capped’ at a growth rate of 6pc of GDP, beyond which our Current Account deficits begins unsustainable growth.

In Pakistan, Manufacturing as a percentage of GDP has been static over time (19.5pc now, 20.5pc a decade ago), and Investment to GDP has fallen (from 20pc to 15pc). We must use CPEC to reverse this trend.

First, the proposed SEZs must have a segment focused on producing intermediate goods, which at present have a rising share in our imports – auto and electronic parts and components, different types of chemicals, etc. This will assist us to expand production of final consumer goods, with decreasing reliance on imports. China has a large number of companies with whom we can form joint ventures to achieve rapid expansion in this area.

Second, we need to set up intensive labour training arrangements with Chinese help at the SEZs. Also, China’s universities assist with research for companies in the SEZs, and often have campuses in the SEZs. We must involve academia in research for our business development strategies.

Third, we must focus on upgrading our knowledge and skills with respect to industrial technology. In the developed world, as in China, the increase in use of new technology – i.e., robots, Artificial Intelligence (AI), 3D printing – will bring down the cost of final goods. This will create pricing disadvantage for goods made in the traditional way. As we go forward, we must use China’s expertise and experience in setting up our new manufacturing plants to take into account recent innovations in technology.

OFFSHORE BANKING UNIT FOR GWADAR

We should consider the possibility of allowing China to set up an RMB Banking centre at Gwadar. This would be useful in different ways.

First, it would provide the convenience of interoperability between Rupee and RMB accounts for Chinese companies working in Pakistan, and also Pakistani companies with China trade.

Second, it would allow Chinese investors easy access to Pakistani investment accounts, whether with the stock market or in the securities market.

Third, to the extent that the OBU also allows other trading partners of China in the region to transact through Gwadar, it would help build an international centre for RMB there. Of course, SBP concerns will need to be kept in mind if the idea is to be pursued further.

PAKISTANI PERSPECTIVE

Industry in Pakistan has long complained about inadequate infrastructure being a major hurdle in achieving sustainable economic growth. Hopefully with the completion of CPEC projects and the formation of these economic zones, many of those concerns will be alleviated.

Pakistan will be able to truly experience private sector led growth – with the government focussing on policy-making and regulation.

However, CPEC has to be matched with consistency in policy. Only then will we be able to attract sustainable investment and benefit fully from the initiatives underway. We will have to create an advisory council on CPEC where all stakeholders are represented.

BENEFITS TO CHINA

China stands to benefit from CPEC in a number of ways. Trade routes have been central to generating wealth since time immemorial. The rise of Western Europe was preceded by the opening of trade routes with the Arab world which introduced them to advancements in things as far reaching as science, alchemy, mathematics, weaponry, architecture, food and medicine.

Portugal became a global empire in the 16th century following the discovery of the route to India around the Cape of Good Hope. In the 19th century, the opening of the Suez Canal was a revolution that singlehandedly reduced travel distance by 7000 km via the Mediterranean Sea and the Red Sea, resulting in major prosperity for Western Europe.

For China, CPEC will create a secure trading route that will serve as an alternative and will link much of the world with its western region.

GEO-ECONOMIC IMPORTANCE

Presently approximately 80pc of China’s oil is transported via the Strait of Malacca to Shanghai – a distance of up to 16,000 km and a time period ranging from two to three months. With Gwadar operational, this distance will be reduced to 5000 km.

EXPORTING GOODS

China will be able to move manufacturing capacities to Pakistan and benefit from its lower cost-based advantage. Besides, companies in the economic zones will have the necessary connectivity to export their goods to Asia, Europe and beyond. This will help sustain momentum in Chinese exports while retaining competitive advantage.

CONCLUSION

CPEC can be a win-win for both China and Pakistan. Key lies in collaboration and execution. We are off to a good start. Let us put all our efforts in concluding these projects in a timely manner in order to generate maximum benefit.

The writer is Chairman, National Council of Economic Advisers.


This article is part of the CPEC 2018 summit supplement. To read more from the supplement, visit the archive.