Pakistan should not take CPEC for granted, writes Dr. Jia Yu. Both public and private sectors must take ownership of the opportunities.
THE economic relations between the two countries have been phenomenal, especially since the turn of the century. Early economic cooperation was based on political and security interests, like Karakoram Highway, nuclear capability, arms trade etc. Also, it was focussed on energy and mining, but there is now a need for diversification. Pakistan has to take advantage of China’s rise on the global scene. There is a tendency towards having even better economic relations based on market forces and there is a lot of under-exploited potential.
When it comes to win-win cooperation, of course there is a lot at stake for both countries. Pakistan’s interests lie in promoting growth, private sector investment, employment, exports, technology and transfer of skills as well as in the relocation of Chinese firms. China’s interests lie in overseas production bases, new export markets, energy cooperation, and its need for production capacity relocation.
A successful execution of CPEC will ensure economic progress and stability for both the countries, particularly along the border region.
The two countries signed the FTA in 2006 which came in to effect a year later. The FTAs play a major role in the general tendency of increasing trade. Surprisingly, the trade has been relatively low compared to the other neighbours (India, Vietnam, Philippines etc.). And there is a large and widening trade imbalance that needs to be worked on.
There has been a considerable increase in FDI since 2014 which is a positive sign for both China and Pakistan. The main FDI sectors by priority are: power, construction, financial services, and communication. There is, however, very little FDI in the light manufacturing sector.
The Belt and Road Initiative (BRI) is a $900 billion investment, with finance channels targeting green development. It connects more than 60 countries, 60pc of the global population, 30pc of global GDP, and 35pc of global trade.
CPEC, a central link of BRI, cuts 10,000 miles of shipping by sea, and connects ports from Shanghai to Africa and Europe through Gwadar.
PAKISTAN AND CPEC
If things work out smoothly, Pakistan could use the FDI in its power and transport infrastructure and then in the manufacturing sector with the experience of leveraging SEZs to unlock this trio’s potential for rapid gains in job-rich industrialisation. This can be done without unrealistic pre-requirements as the work to lay the foundations for industrialisation has already begun.
The potentials are outlined below along with policy options needed to convert them into actions. At regional level, Pakistan has been growing steadily in terms of GDP per capita since 2010, according to the World Bank. Investors are very keen to a growing economy. Consistent growth of purchasing power (GDP per capita) really matters for domestic consumption; therefore the growth rate must be maintained to catch up with competitors.
Pakistan is one of the world’s largest reservoirs of human capital and has a tremendous potential consumer base. In 2016, the country was home to 193,203,476 people, being the world’s 6th most populous country. World Economic Forum estimates that it will be among the top five populous countries in the world by 2060.
However, a large population is necessary but not sufficient to attract investors. The population has to be equipped with adequate skills to meet industrialisation needs. Effort is also needed to attract global buyers.
Thirdly, China and Pakistan have long hailed each other as “all-weather friends”, or “iron brothers” as close as “lips and teeth” in the words of The Economist. There is already solid trust between the two countries, but the Pakistani officials need to visit China more often to convince the private investors for investment opportunities in Pakistan.
The CPEC will improve road, air, sea, and energy infrastructure. It will ensure land, sea and air security. It will enhance trade and investment facilitation and will establish free trade areas that meet high standards, maintain closer economic ties, and deepen political trust. Also, it will enhance cultural exchanges and promote mutual understanding, peace, and friendship between the people of the two countries.
Having said that, the CPEC should not be considered just a ‘gift’ from China, but the Pakistani government should also establish an FDI Advisory Board that shall promote the new image of the country. This includes visiting China more often and ensuring that investors understand the opportunities and benefits available under the CPEC.
Besides, according to the State Bank of Pakistan in November 2017, the country received net FDI worth $207 million out of which $206 million came from China. Potential investors pay significant attention to first movers, other Chinese investors may follow and eventually stay in Pakistan if the government helps the pioneers to be successful.
In terms of binding constraints, a study case of Malaysia estimates that FDI can effectively contribute to growth if it is at least 3.14pc of GDP. Pakistan should be able to compete. This requires overcoming the binding constraints by addressing security issues and risks, hard infrastructure challenges, especially SEZ-specific constraints like energy, roads to SEZs etc. Soft infrastructure challenges include corruption, rule of the law, coordination among institutions, inadequate capacity and cultural biases. Absorption capacity can be adjusted by setting yearly realistic targets of FDI amount.
There are six steps to identify the right industries, as narrated by Prof. Justin Lin. They include identifying countries with consistent growth, with GDP per capita three times as Pakistan’s or was at the same level as Pakistan 30 years ago.
Next comes investigating the existing private investment in those target industries and encourage its development by leasing the market regulations. Attracting global investors into the target industries which lack existing domestic private investment is the third step, followed by paying attention to new enterprises and supporting innovation in the target industries.
Establishing and developing SEZs to eliminate entering barriers, attracting foreign investment, and encouraging industrial cluster. And, finally, providing policy incentives for the first movers, including tax reduction, foreign exchange access, etc.
THE WAY FORWARD
Development can start from ‘low-hanging fruit’ through SEZs. The government should attract first movers to invest and help the pioneers succeed.
CPEC should not be taken for granted. Proactive and systematic approach is needed for attracting investors, together with strong market factors.
Despite long-term and solid trust at the government level, more mutual dialogues and exchanges need to be enhanced in the private sector. Let the peoples get to understand each other.
CPEC and SEZs are open for all investors, including those from other countries beyond China.
The writer is a professor at the Institute of New Structural Economics (INSE), Peking University, China.
This article is part of the CPEC 2018 summit supplement. To read more from the supplement, visit the archive.