CPEC could develop into Pakistan’s debt trap

Published: December 11, 2017
SHARES
Email
A truck drives along the China-Pakistan Friendship Highway before the Karakorum mountain range near Tashkurgan in China's western Xinjiang province. PHOTO: AFP

A truck drives along the China-Pakistan Friendship Highway before the Karakorum mountain range near Tashkurgan in China's western Xinjiang province. PHOTO: AFP

ISLAMABAD: The Pakistani economy is going through a ‘Creative Destruction’ of sorts. Firms without value addition, global market connectivity and innovation are dying a ‘peaceful death’ or re-locating. Unemployment level remains high. The official data are not credible. There is a lack of implementation machinery for facilitating Chinese private sector’s MoUs, deals, contracts and agreements.

Only big ticket projects by state-owned enterprises are being monitored by officials. The Board of Investment (BoI) mandarins lack corporate capacity, knowledge of global best practices, legal and marketing professionalism and have only English-speaking and may be some drafting skills.

The private sector has failed to move beyond ‘family businesses’, better known by the acronym ‘seth culture’. The private sector has entrenched domestic lobbies in the economy, while the public sector confronts institutional tussles and adopts a solo flight approach. The ruling political class lacks vision, integrity and leadership, with a culture of nepotism, favouritism, and cronyism in governance.

There is also a lack of collective leadership, consensus, compromise, co-existence and teamwork among the various state organs of power along with a lack of consistency in public policies. The small intellectual elite has been either sidelined or has chosen a ‘monastic life’ disgusted to see the affairs of the state, ever since the departure of the founding father Quaid-e Azam Muhammad Ali Jinnah and the first Prime Minister Shaheed Liaquat Ali Khan.

Can CPEC cause Dutch disease?

Pakistan needs to attract Chinese private sector investors by offering additional incentives. Their investment in small and medium enterprises by way of joint ventures will bring in 90% of the investment envisaged under industrial zones or SEZs of China Pakistan Economic Corridor (CPEC). The existing policies are inadequate with Pakistan unfortunately becoming a captive market for existing monopoly investors, who blackmail the government, and an import mafia which remains keen to import anything or everything, in cohort with the concerned state institutions that destroys domestic economic activity.

An indication of this is visible as to how Pakistan’s ‘Oil Bonanza Surplus’ of $14 billion from 2013-2017 due to falling oil prices, was dissipated on increasing consumer goods imports which has sent the current account deficit to a historic high.

Pakistan’s human resources with nearly two-thirds of the population below the age of 30 years are its greatest asset. Its strategic geographical location is also a great advantage, but not the only one. Social capital is yet another with the most resilient, passionate and determined population. Natural resource endowments are another plus with eleven minerals included in top ten of the world’s reserves and an irrigation system which is the world’s second largest.

Pakistan boasts of eight climatic zones, 14 vegetation zones and four topographic zones. The country is blessed with a natural solar belt and a wind corridor. Almost half of the country sits on Shale gas reserves, which can be exploited with the availability of affordable technology. The Makran coastline is richly endowed with ‘Condensed Ice Gas hydrates’. Now the technology to harness it has become affordable and available, with the Chinese showing the way. The list can go on and on.

CPEC worth $62 billion is a flagship project of the Belt and Road Initiative. Besides energy, infrastructure, transport and Gwadar Port development, the most important component of CPEC is the development of the industrial zones, nine of which have been prioritised. These industrial zones also called special economic zones (SEZs) will house the thousands of Chinese industries and enterprises which are planning to relocate to Pakistan.

Since fiscal year 2013-2014, China’s direct investment in Pakistan has been at the top among all the foreign countries, for three consecutive years. Chinese total investment in Pakistan has reached more than $5.4 billion, making it the largest investment destination in South Asia. The hype on the CPEC is justified as long as the necessary spade work on the various details of operational, technical, administrative, fiscal, security and institutional coordination aspects are addressed.

There is a great possibility for a quantum leap in Chinese investment with the relocation of Chinese industrial enterprises to the proposed ‘Special Economic Zones’ all along the routes of CPEC. The success of CPEC investments along with reforms will transform Pakistan’s economy like never before.

Pakistanis are used to present others with surprises, whether on cricket grounds, battlefields or in geostrategic games, but the CPEC has surprised all Pakistanis. A lot of Pakistan’s intellectual elite do not know frankly as to how to react. It is obvious that for a country which has been in ‘Intensive Care Ward’ of the international financial institutions (IFIs), struggling with a billion or two of FDI, to be offered the prospects of inflow of $62 billion (still evolving), is beyond imagination. Even more difficult to comprehend, is the fact that $20 billion of Early Harvest Power Projects are already nearing completion. It is apparent that Pakistan is fast catching up with the ‘Chinese speed of growth’.

Not only China, but Russia, Central Asia, Afghanistan, Iran, Saudi Arabia, Europe and Africa are finding the CPEC as an ‘economic bonanza’ opening up ‘new growth points’ for wealth generation, in a recession-prone global economy. No wonder there is growing interest in CPEC.

However, for ensuring the full success of CPEC, there is need for adoption of an ‘Enabling Policy of Comprehensive Reforms’, in consultation with the private sector and ‘Overseas Pakistanis’ to ignite ‘Chain Reaction’ for Pakistan’s industrial potential. In this respect, Pakistan could emulate the success of China in mobilising the overseas Chinese.

Sheer size of CPEC portfolio appals IMF

The comprehensive reforms could cover good governance, agriculture, industry, energy, taxation, SEZs, SMEs, civil service, electoral, land, labour, administrative structure, higher education, foreign trade, maritime, higher education, health, environment, social sector and community development, rural industrialisation, rural credit market and banking coverage.

The resultant consequences of inaction and lethargy to enact policy reforms have been a low rate of domestic savings, tax collection, FDI and low fixed capital investment, low factor productivity, poor innovation, low level of exports, poor innovation, backward vocational and technical skills level, widespread destruction of the cottage industry and decimation of the SMEs etc. Similarly, there is an urgent need for micro-level research in universities and think tanks, on the sector wise impact of CPEC on local industry (terms of trade), environment and society.

Pakistan also needs to strengthen the professional and institutional capacities of its private and public sectors in order to fully harness the openness of the Chinese market by promoting its exports, provide a level playing field to Chinese investments, promote interoperability with China’s private sector, benefit from China’s outgoing tourism boom by mutual relaxation of visas and develop the full potential of the border land route.

Those capacities will need to be created, which the ‘Macaulay’s system of education’ has not allowed to be developed in the colonial slave societies. The most important of these is the capacity to think, research and innovate. There is also the need for revival of Pakistani social capital, our age old soft power values and work ethics to enhance the ‘Total Factor Productivity’, learning from Global Best Practices and success stories including China.

CPEC is a means to an end which ultimately is the economic take off of Pakistan. CPEC will become only ‘supply side economics’ without policy reforms, and will be unable to trigger the ‘economic take off’. There is an absence of ‘soft infrastructure’, which increases the cost of doing business. It is important that Pakistan’s think tanks, research bodies and policy-making institutions begin in earnest, identifying, conceptualising and drafting a series of ‘policy reform packages’ in every sector of society and economy, for submission to the parliament for priority enactment and executive agencies for speedy implementation.

If it does not, without timely wide-ranging comprehensive policy reforms, CPEC could develop into a debt trap. Time is of essence to avoid subsequent anarchy and chaos which can mutate into a ‘colour revolution’ of sorts. Precious time has been already lost. There exists now only a narrow time space between 2017-2020 to conceptualise, enact and implement the first phase of policy reforms, in order to realise the full potential of the economy. Those holding back reforms are in fact aiding Pakistan’s return to the IMF with unpredictable consequences.

Once, China’s Premier Zhou Enlai was asked about his views on the ‘French Revolution’. He responded by saying that it was ‘too early to comment’. Pakistan is among the best blessed and placed societies in the world.  Pakistan only needs to develop a sound political system through wide-ranging electoral reforms, creating a filtering mechanism to ensure integrity, merit, rule of law and justice.

London mayor-led delegation shows interest in CPEC

Pakistan has the potential to emulate China’s success in less than two decades, if it can adopt wide-ranging policies and reforms under a collective leadership. The CPEC puts Pakistan at the ‘epicentre’ of a historic global transformation. Pakistan, however, needs a reformer, statesman and visionary like Deng Xiaoping, Lee Kuan Yew or Mahatir Mohammad, to make it happen. The 200 million people of Pakistan must have them.

The writer was Pakistan’s Ambassador to Germany, Singapore and Mauritius. He spent a decade in China and is an author of several books. He is currently the Director of Chinese Studies Centre in National University of Science and Technology, Islamabad

Published in The Express Tribune, December 11th, 2017.

Like Business on Facebookfollow @TribuneBiz on Twitter to stay informed and join in the conversation.

Facebook Conversations

Reader Comments (13)

  • Atif Siddiqui
    Dec 11, 2017 - 10:34AM

    Our Chinese brothers will always look after Pakistan’s interest. Suddenly this bad news about CPEC is organized by MOSSAD, RAW and CIA to affect confidence. Recommend

  • Nadeem usmani
    Dec 11, 2017 - 11:36AM

    Is there any more illness that is not grapple with Pakistan. Whoever written the article just spreading the disappointment/dissension at a grandest level.he has sum up the deceases Pakistan facing with thorough research in a one go–

    Please, take a breath of fresh air. Do not become a machinery of dissatisfaction and dismay. Recommend

  • Muhammad Ali
    Dec 11, 2017 - 12:37PM

    A proper thought is given to this article. We need reforms. Rules Regulations how the system should work. Proper planning in short we require which is Pakistan lacking. Most importantly vision what we have to achieve from CPEC.Recommend

  • fahim
    Dec 11, 2017 - 1:30PM

    If we deploy 55 Billion for Pakistan industry then ourGDP could rise more than 500 Billion dollar. Recommend

  • Bunny Rabbit
    Dec 11, 2017 - 1:54PM

    I think they should start hiring people from outside .Recommend

  • Bunny Rabbit
    Dec 11, 2017 - 1:54PM

    @Atif Siddiqui:
    How typical of you .Recommend

  • Jahan Zaib
    Dec 11, 2017 - 2:46PM

    The author deserves applauds for rightly pin pointing the main problem of pakistan in the way of its people progress . Which is the governance and honesty. We are indeed in a good time of history of opportunity with the availability of right resources. But unfortunately, everywhere in each organization, institutions only dishonest opportunists are sitting, who have been given the right to decide each and everything in their own self interest.Recommend

  • Nadeem Usmani
    Dec 11, 2017 - 2:53PM

    All the problems we are facing in Pakstan not the Govt. generated. we could not expect a launching pad from a present political set up that bring us out of all the ills society is facing. Pakistani society could not flourish within days by the reforms to enter into the developing world. As slowly and gradually we have reach to that low level, it will take same gradual steps to go up on the progress ladder.

    Let the time to ameliorate some of our misries,and the time to streighten of our political system.One after one, pulling legs of the each polical Govt. would not bring us to the shore only take us to more deep in morass.. There is already too much clamoring opposition which could not do themself anything worthwile. what we expect from them when they would be in power.

    Some of the good steps govt has taken under the One Belt One Road , is the project of upgradation of our slow railway system to speedy 250km/h track. initiation of work of karachi KCR —, i hope to see that in my life. and some of the Power projects Govt claiming to be completed till March-April of 2018.

    I am not of govt spokperson but these works needs to be mentioned . Not that much glitering performance but not so much gloomy.Recommend

  • Sami Baloch
    Dec 11, 2017 - 2:57PM

    If CPEC is a debt trap then Pakistanis should have saved money and should have developed this infrastructure on their own. I am a Pakistani and I want say to Pakistanis that stop being in idiot. CPEC is absolutely good for the country. Recommend

  • cuban
    Dec 11, 2017 - 8:54PM

    Some would argue that having a large undereducated population is a liability – not an asset. And while it’s common for Pakistani authors to talk about Pakistan’s strategic location nobody has explained why Pakistan has yet to make any significant money on it’s location. Maybe it’s not all that strategic?Recommend

  • Kolsat
    Dec 12, 2017 - 4:10AM

    @Atif Siddiqui: China built a port in Sri Lanka which she has taken over on a 99 year lease because Sri Lanka cannot repay the loan. I hope this does not happen to Pakistan. Do not be under false impression that China is doing anything for altruistic reasons. Recommend

  • vinsin
    Dec 12, 2017 - 11:28AM

    @cuban:
    Pakistan has made close to $100 billion because of her strategic location that is one-third of Pakistan GDP. That is second highest money ever made by a nation because of her strategic location.Recommend

  • ishrat salim
    Dec 13, 2017 - 3:40PM

    @Sami Baloch: Yes, agree, CPEC is good, this has not been disputed by the author also, but what the article reveals are the pitfalls, if we cannot take advantage of this project in our favor. We as a country is blessed by allah, with so many resources, people, minerals, wind, solar etc; but since we are beset with dishonest people at the helm of affairs running the country, CPEC will be only be advantageous to the Chinese, while we will be paying back the loans with interest, but how ? what is the road map ? that has not yet been taken into account & that is what is so much worrisome. We have to shun our differences & put our minds together how to make CPEC in our advantage. That is what all the opposition parties are demanding, which the govt is not coming out with any convincing answers. Recently, Chinese built sea port in Sri Lanka was handed over to the Chinese
    on a 99 years lease because the govt was unable to pay them back the loan. This is a kind of scenario we are worried about. So, to my CPEC friends, let us not fall into his illusion that CPEC is all gold, remember, all that glitters is not gold. One fine morning, you may woke up to find that streets full of Chinese Army, PM & President house TV station & all govt depts have been take over by the Chinese. DEMOCRACY suspended. How that sounds ? dreadful ! Right, so, please be positive but practical. Recommend

More in Business