Will CPEC translate in meagre or mega benefits for Pakistan?
PublishedJune 13, 2018
By Abdul Hafeez Shaikh
Will CPEC translate in meagre or mega benefits for Pakistan? The answer lies entirely in Pakistan's hands, according to Abdul Hafeez Shaikh, Federal Minister for Finance, Revenue and Economic Affairs; Planning and Development; and Investment and Privatisation.
THE relationship between China and Pakistan is a time-tested one. The two countries have strong diplomatic, political and military ties. However, the relationship between the two peoples and the business communities has been a limited one with the result that the great economic transformation of China is not reflected in the magnitude of the economic relationship.
The launch of the China-Pakistan Economic Corridor (CPEC) may redress that equation. The CPEC, a network of projects in Pakistan, is an attempt to link the two economies, and, if designed and implemented properly, can be transformational both for Pakistan, Western China and the region at large.
To understand the reality of CPEC in its due context, it is necessary to take a look at the Big Facts about the two economies, the current international economic environment, the main features of the Belt and Road Initiative (BRI) and CPEC, and key considerations that may be critical if the initiative is to ‘work’ i.e., live up to its fullest promise.
CHINA: BASIC FACTS
China’s population is about 1.4 billion. Its current Gross Domestic Product (GDP), the sum of all goods and services produced in the country, is $12 trillion, second only to the USA ($19 trillion) and more than the combined GDPs of Japan, Russia, India and Brazil. It is one of the most globally integrated economies with annual trade surpassing $4 trillion, and a foreign direct investment (FDI) stock of $1.4 trillion.
China’s economic rise is due to the policies adopted by Deng Xiaoping and his successors since the late 1970s. The scale of China’s success can be measured by two achievements unparalleled in world history: (1) the average annual growth rate during the period 1978 onwards – for about 40 years – has been close to 10 per cent, leading to (2), the lifting of about 800 million people out of poverty! If leadership is measured by the impact on the lives of the most number of people, Deng Xiaoping is unrivalled in the 20th century.
In spite of these attainments, China faces some real challenges. The first of these is to improve its income per person (GDP per capita). The current per capita GDP ($9K) places China at number 71st in the global rankings, well below Switzerland ($80K), US ($60K), Singapore ($57K), Germany ($44K), Japan ($39 K), and also Turkey ($10K) and Malaysia ($10K).
The second problem is that China’s strong average performance conceals wide income disparities within the country. Some regions (Shanghai, Tianjin, Beijing, Shenzen) have done much better than others. For example, the poorest region Guizhou has income one-fourth that of the richest one Tianjin. The difference between urban and rural areas is 3:1 and between coastal and inland areas is 2:1. These regional variations can range between $20,000 for some versus $5,000 for others and pose a threat to social cohesion and harmony.
There are many reasons for the Chinese success story, including political and economic stability, smooth transition of power from one set of leaders to the next, and a disciplined and inexpensive labour force, but one of the leading factors has been China’s capacity to sell its products to others (exports: $2.3 trillion) and form alliances with international firms to bring hundreds of billions of dollars of investment into the country.
An example of its willingness to benefit from trade even when it has a serious dispute with another country is its economic relation with India. China is India’s biggest trading partner ($85 billion). Last year alone India’s exports to China increased by 40 per cent.
PAKISTAN: BASIC FACTS
Pakistan has a population of 210 million and a current GDP of about $0.3 trillion. The per capita GDP of $1,630 puts Pakistan at number 145 globally. Its average historical growth rate is just below five per cent. Pakistan has been unable – throughout its history – to have a sustained period of high growth rate in its national income. The ‘growth spurts’ it has experienced have never lasted for more than four years.
A big and continuing failure of all governments – and the business community – has been the inability to integrate the Pakistani economy globally, or even regionally. The country has never excelled at exports or succeeded in convincing others to bring their capital to Pakistan. This failure to form alliances and build economic bridges with others is in contrast to the experience of China and other successful emerging economies.
Two other big facts of Pakistani history have shaped – stunted – the economic trajectory of Pakistan keeping it trapped at a low level of economic attainment.
One of the factors behind China's success is its capacity to sell its products to others and form alliances with global firms to bring billions of dollars of investment into the country.
The first fact is that since its independence in 1947, Pakistan has had to – continuously – face war. These include the border conflicts, the Kashmir wars, the 1971 War, the Cold War, the Soviet Afghan War, and the so-called Terror War.
These conflicts have been costly, skewed public expenditure decisions, and created perceptions about the country that have deterred international players from making longer-term commitments to the country’s economy.
The second big fact is that throughout its history, political stability has eluded the country. For example, no elected prime minister has completed tenure and the transitions have at times been unruly, costly for the country, and led to the disruption of any emerging momentum in the economy.
Pakistan has made some strides in the last few years. The Constitution has been restored, elections take place, the last transition of political power was relatively smooth, there is freedom of expression on most subjects, and the Civil Society – at least in the urban areas – can be a vocal, organising force.
Also, the country’s potential remains large. It is abundantly endowed with natural resources, minerals, coal, water, gas shoreline and a location at the centre of three regions. The hope remains strong that somehow the next opportunity will not be missed! Is CPEC that opportunity?
GLOBAL ECONOMIC SITUATION: ALTERNATIVE VISIONS?
The current global economic situation appears to be in good shape. The global GDP is around $75 trillion, the growth rate in 2017 was 3.5 per cent and the IMF projection for 2018 is 3.9 per cent. This relatively good performance is spread across many regions of the world.
However, just below the surface there is anxiety; the mood is not one of celebration but that of concern.
There is a fear that if things begin to go wrong, the room for manoeuver may be limited. The interest rates have already been brought to a very low point. The Fed target rate is 1.5 per cent, the ECB rate is around zero, limiting the effective use of monetary policy.
The US has just given a 1.5 trillion-tax cut, increasing public debt to a dangerously high level. China’s Private Debt is seen to be too high. And some countries are running chronic imbalances. China, Germany and Japan have chronic Current Account surpluses while the US and the UK have chronic Current Account deficits. These factors are reminders of the global crisis of 2008 and the Eurozone Crisis of 2010.
The public rhetoric in parts of the US and some countries in Europe has also turned hyper-nationalist, protectionist and questioning of the global financial architecture. Britain has opted out of the EU, and hardliners have gained in the polls in some European countries.
US statements on the Paris Accord, North America Free Trade Agreement (NAFTA), and the TransPacific appear to reveal a break from the past. Tariffs have been imposed on some items with threats of more to come. If these policies are expanded or entrenched, they will stir fears about looming trade wars and a downturn in the global economy.
In a world where multilateralism, even free trade, are being questioned by some important voices, Chinese President Xi Jinping is offering an alternative vision of connectivity, facilitation of trade and integration of markets across regions and continents.
BELT AND ROAD INITIATIVE (BRI)
The BRI focuses on connectivity and cooperation between China and Europe/Asia. President Xi Jinping announced it in 2013. Estimates of its overall size range between $4 and $8 trillion, covering 68 countries in Asia Pacific, Central and East Europe, with 40 per cent of the world’s GDP.
The ‘Belt’ covers the ‘Land’ and the Maritime ‘Road’ covers the ‘Sea’. Land projects include:
Eurasian Land Bridge (Western China to Western Russia)
Railway from Xinjiang to Germany (via Kazakhstan, Russia and Poland)
China Mongolia Russia Corridor (Northern China to Eastern Russia)
Central and West Asia Corridor (Western China to Turkey)
Indo-China Corridor (Southern China to Singapore)
The Maritime Silk Road fosters connectivity through contiguous bodies of water: the South China Sea, the South Pacific Ocean and the wider Indian Ocean.
CPEC: KEY FEATURES
The CPEC is officially classified as “closely related to the Belt and Road Initiative” and is a collection of infrastructure projects for Pakistan (current size $45 billion, expected size $62 billion). The key projects are:
Gwadar Port, established in 2013, is planned to be a central hub in the connectivity scheme. Starting in November 2016, Chinese cargo transported overland was shipped to Africa and West Asia.
Transport projects for $11 billion from the Gwadar Port to Kashgar with connections to Central Asia and to the Chinese ports in the East. The main alignments are: Eastern Alignment involving upgrading of existing 1152 km highway between Karachi and Lahore and linking with an upgraded Karakorum Highway (KKH) which enters China at the Khunjerab Pass; Western Alignment from Gwadar to D.I. Khan to Hasan Abdal connecting to the KKH.
Energy Infrastructure: $33 billion worth of electricity plants and transmission lines. Electricity will be based mainly on fossil fuels, but also hydro, solar and wind energy. Early harvest projects have added 4000MW so far and another 6000MW to be added in 2018-19.
Ten Special Economic Zones in different parts of the country, out of which three have been identified in Faisalabad, Hattar and Dhabeji for the first round. The SEZs provide tax holidays and concessions of various sorts to attract Chinese investors.
CHINA’S OBJECTIVES FOR BRI AND CPEC
The first objective is to extend Chinese surplus capacity and influence to Asia and parts of Europe.
Asia – outside China – needs $900 billion per year in infrastructure investment over the next decade, which is 50 per cent above the current levels. This gap in long-term capital can be filled by China and the China-led Asia Infrastructure Investment Bank. The availability of this finance provides the incentive for countries to participate in the BRI/CPEC.
The second objective is to develop Western China, integrate it economically with Mainland China, and complement Western Development Plan for Xinjiang, Tibet and Qinghai.
The third objective is to create an alternative to the current shipping route via the Malacca Straits and the South China Sea.
Sixty per cent of China’s oil comes from the Middle East, mostly from this route to the Eastern ports of Tianjin and Shanghai. The current distance on this route is about 11,000km.
The route from Gwadar to Kashgar is 3,000 km and from there to Tianjin is 4000 km, thus the combined distance (7000 km) of the proposed route via Pakistan is considerably less than the current route, bringing down shipping costs, and hedging against the risks of a single route.
PAKISTAN’S CONSIDERATIONS: MAKING CPEC WORK
Is it China or China Plus? Are we looking for meagre benefits or mega benefits?
The CPEC projects – port and city, roads, power plants, economic zones, railways, pipeline in the future – will involve costs. These costs will be incurred on land, equipment, interest and employees.
These projects will also yield benefits in terms of wages, profits to the private sector, revenue to the government and some positive impact on the macroeconomic indicators.
The difference between the benefits and costs will give us ‘net benefits’. How to maximize net benefits? How to ensure that the benefits are not meagre but mega? If the projects are costly, their execution inefficient, their capacity underutilised, their links to the rest of the economy minimal, and they generate political discord within the society, the net benefits can easily be meagre or even negative.
The key to maximising net benefits lies in taking other complementary steps. This will require that during construction the costs are minimised, the leakages checked, corruption reduced and procurement kept transparent. This will also mean that once the projects are operational they will be managed on international standards.
Clearly, the Pakistan Railways – as it is run now – cannot be entrusted this formidable task. Surely, the same people who have presided over the failure of our past economic zones cannot be counted on to manage the new zones differently. And our way of resource allocation and implementation of our Annual Development Plans do not auger well for the CPEC projects.
The final point is that to go from meagre to mega benefits it is imperative that the infrastructure created is utilised to the fullest, and that means leveraging these facilities to open new markets (Central Asia, Africa, Europe), and invite new players, i.e., starting with China but aiming for China-Plus.
If it turns out that CPEC ends up simply servicing the activities for China, it will be good but not great. The benefits will not be realised to the fullest. For mega benefits, Pakistani businesses will have to play their part in enhancing exports and getting other investors to join.
If CPEC is not leveraged to forge new alliances, partnerships and business relations (more FDI, exports, jobs), then mega benefits will not be realised.
EQUITABLE DISTRIBUTION OF BENEFITS FROM CPEC
There is considerable debate and legitimate concerns on the income distributional consequences of CPEC. CPEC will generate additional incomes in the country. Some questions arise that are relevant for welfare economics, national cohesion, and for a broader ownership of CPEC by the country as a whole.
These questions are: How will these additional incomes be distributed across regions and income classes? Where will the money on new infrastructure go? Who will get the new jobs? Who will make the profits? In short: Who will really benefit?
Take an example. Thousands of trucks are expected to transport goods on the routes from Gwadar to Western China. Some immediate questions arise: Who will produce these trucks? How will business be allocated to the trucks? Who will own the trucks? How will the money from the truck owners flow to the rest of the economy? What if all the truckers belong to a single region? Or two institutions? Or three families? Or four chief ministers?
The longer-term success of CPEC will require that the benefits are equitably distributed both in terms of location of infrastructure and incremental economic activity i.e., employment, profits, business deals and government revenue.
A reminder would be in place. The most touted period of high income growth in Pakistan in the 1960s was accompanied by income disparities with grave consequences both for the government and the country.
REPAYMENT OF LOANS
The loans taken from China for the CPEC projects will have to be repaid; principal and interest. The interest rate charged by China varies by type of project. For some loans specific to Gwadar Port and city, the rate is zero. For many infrastructure loans the rate is between 1.4 and 2.4 per cent. For power projects on more commercial terms the rates are 5-6 per cent. If we assume that $100 billion have to be returned as principal and interest over the next 20 years, an allocation of about $4-5 billion per year would be required.
These borrowings will add to the external debt of Pakistan and potentially weigh heavily on the overall macro economy. An isolated Pakistan economy with chronic underperformance of exports and FDI can find its vulnerability enhanced. Thus it is critical that the project design, procurement and execution are first rate and combined with prudent Government debt management to allow the repayment of these loans.
AVOIDING CHINA-PAKISTAN FRICTION
Not everyone is thrilled with CPEC. Some opponents are in the neighbourhood and some further away. These countries would like to subvert CPEC for their national, regional or global aspirations.
There are also domestic opponents motivated by politics, ideology, grievances or money. Some citizens have fair concerns on the cost of loans, on equitable sharing of benefits or excessive reliance on a single country.
Also, Pakistan is a noisy democracy. A country of jalsas and dharnas, of opinions freely expressed in papers and on TV. There is room for misunderstanding to be created between China and Pakistan. (Another reminder: President Xi Jinping had to delay his trip to Pakistan for the inauguration of the Gwadar Port due to demonstrations in the capital).
There are also Chinese concerns related to security. These can be exaggerated, but nevertheless they are real and need mitigation. High quality dialogue and consultation, awareness of local constrains and opponent’s tactics, and pre-emptive steps and safeguards are required for preservation and enhancement of the harmonious relationship.
I have had the opportunity on various official visits to China to meet with the leaders of China, including Presidents Jiang Zemin, Hu Jintao, Xi Jinping. I was struck by their enormous goodwill towards Pakistan.
Yet it has to be recognised that in spite of China’s phenomenal performance, our proximity to it and the obvious desire of the Chinese leadership, we have not fully benefitted from the rise of China.
The reasons do not have to do with China but Pakistan. Part of the explanation is that our business community has not been as active as the situation demands. This will need to be redressed as Government activity can only take us so far.
Two concluding points: First, we should not just be looking for capital from China but also learning from their experience, and those of the other achievers. There are 13 countries that have experienced growth rates of over seven per cent for 25 years in the postWar period. What lessons can we draw from these success stories?
Five common features – points of resemblance – stand out. These countries: fully exploited the world economy; maintained macroeconomic stability; mustered high rates of savings and investment; let markets allocate resources; and had committed and capable governments.
Finally, CPEC benefits can be exaggerated by the partisans and dismissed by the sceptics. Ultimately it is up to us what we make of it. Is CPEC going to be a transaction or will it be a platform for transformation? Time will tell. But the ball will continue to remain firmly in our court. The choice will be ours – alone.
The writer is a former Federal Minister for Finance, Revenue and Economic Affairs; Planning and Development; and Investment and Privatisation.
This article is part of the CPEC 2018 summit supplement. To read more from the supplement, visit the archive.