British Airways and FDI take-off

Perhaps the finest news coming out of the new government in recent days was British Airways’ announcement to resume direct flights to Pakistan. As surprising as it sounds, air connectivity and direct flights have a significant relationship with inflows of foreign direct investment (FDI) and economic growth.

Research by Redondi and Mutinelli shows that introduction of new air routes increases the likelihood of FDI exchange between newly-connected regions. The study, conducted in Italy, showed that FDI increased overall by 33% within two years of opening of the new routes, compared to 16% decrease for the comparison group. The research also highlighted that the size of a city was in fact far less important than the level of global connectivity in determining the flow of international investments.

These results do not only hold true for developed economies. IATA research shows that the relationship between higher levels of connectivity and higher GDP is even more visible for developing countries.

In another study, economists at Harvard and University of Zurich looked at 819+ cities across 200 countries and found that cities that are 6,000 miles or less apart are more likely to have significant business connections.

How does air connectivity lead to business connections, increased investment and GDP growth? Besides promoting tourism, direct air connections also reduce travel times for investors and executives, enabling them to oversee operations in remote locations and providing them access to a wider marketplace. As humans easily travel across borders, capital also tends to follow. Companies are known to consider air connectivity as a key consideration before relocating their businesses. Better air connectivity leads to FDI inflows and increase in economic growth generates more demand for air travel, creating a cycle.

What does it mean for Pakistan? While Pakistan enjoys a unique geostrategic location with major economic hubs lying within 6,000 miles, its air connectivity remains weak, preventing making full use of this location advantage.

Until a few years ago, Pakistan was on the destination list for global heavyweight airlines like Lufthansa, Cathay Pacific, KLM, Swiss Airlines, Scandinavian Airlines, Air France, British Airways, Alitalia, Japan Airlines, Singapore Airlines and even the defunct Pan American Airways. Over the years however, they stopped serving Pakistani cities, mostly because of security reasons but some reportedly due to their stifling experience with the regulators. Today, out of 50+ airlines flying to South Asia, only 12 land at any Pakistani airport.

The situation seems even bleaker when look through the lens of overall air traffic indicators. World Bank data shows that only a few decades ago, Pakistan was a key contributor to the regional air traffic. The total number of domestic and international departures from Pakistan grew by 83% during 1977-1997, outpacing South Asia’ growth of 80%.

In the last 20 years however, the situation took an unexpected turn. While the total number of departures from South Asia grew by a whopping 300+ per cent, those from Pakistan declined by about 9%. Similarly, Pakistan, which in 1997 accounted for about a quarter of air transport passenger traffic of South Asia, now claims a mere 6%.

No wonder that Pakistan’s FDI inflows as percentage of GDP, which had historically remained above South Asian average, fell well below it during the last decade. And while one cannot solely blame poor air connectivity for the shrinking FDI, it definitely had some role to play.

British Airways’ decision is just the start. We now need to reach out to other internationally-reputed airlines to resume their operations to Pakistan and put our cities prominently on the global air travel map. This should be complemented with an improved visa-on-entry regime. With improved air connectivity, we should also hope for more international visitors, leading to a possible FDI take-off and better integration with the global economy.

Published in The Express Tribune, December 25^th, 2018.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.