China industries relocate elsewhere

Study highlights hurdles in Pakistan like law and order, labour productivity

KARACHI:

There was talk all around that world’s second largest economy China would relocate its labour-intensive industries like textile to Pakistan to take advantage of reduced production cost. The move would create job opportunities for the low-cost labour in Pakistan and help boost export earnings.

However, Pakistan has so far failed to woo Chinese industries as many have gone to Cambodia, Laos and even Ethiopia, though their cost of labour is higher than the cost in Pakistan and their markets are far smaller in terms of population.

Pakistan Business Council (PBC) – a business policy advocacy platform – has published a detailed study titled “Catalysing Private Investment in Pakistan: Leveraging Chinese Investment in CPEC” in May 2022 to highlight the hurdles to foreign investment in Pakistan.

Pakistan may yet welcome some Chinese industries – and foreign investment from other global destinations – as Beijing is shifting its industrial units beyond borders to remove the “Made in China” label from many products to win back US markets.

Washington has increased import duty on scores of Chinese products under a trade war.

The PBC study says it is aimed at providing guidance to policymakers on addressing the fundamental issues, which have resulted in low investment in Pakistan.

It makes comparison of key indicators with Pakistan’s peer economies and highlights the obstacles faced by Chinese investment under the China-Pakistan Economic Corridor (CPEC) framework.

The study says Chinese manufacturers appear to have moved part of their capacity offshore to avoid the “Made in China” label, most notably to the countries in Southeast Asia such as Vietnam, Thailand, Indonesia and Malaysia.

“Smaller countries in the region, such as Cambodia and Laos, also appear to have received significant amounts of Chinese FDI (foreign direct investment).”

The trend of relocating offshore among Chinese manufacturers presents a significant opportunity to Pakistan. This opportunity (of attracting Chinese factories) is centred round textile and apparel manufacturing.

However, a range of other industries – from auto parts and light engineering to mobile phone assembly/ manufacturing – can also be the potential targets for relocation if the right environment is created.

China’s investment in the Belt and Road Initiative (BRI) countries has grown steadily since 2013. Its total investment in these countries amounted to $139.5 billion between 2013 and 2020.

“Pakistan’s share in China’s OFDI (outward foreign direct investment) in BRI countries since 2013 stood at 5.1%, with total gross inflows amounting to $7.1 billion over this period,” said the study.

The report highlights a number of broad issues hindering investment decisions in Pakistan. These include the political risk impeding long-term investment, an unfriendly tax and regulatory regime for businesses, low labour productivity, weak intellectual property rights, uncompetitive energy prices, high logistic costs, limited comparative advantage in accessing external markets through bilateral or regional trade agreements, etc.

The flow of FDI into Pakistan has remained low as a percentage of gross domestic product (GDP) and in relation to its market size compared to the surge in investment in peer countries.

Pakistan attracted FDI worth $1.8 billion in 2020 compared to $5.1 billion by Laos, $3.6 billion by Cambodia and $5.5 billion by Vietnam. Bangladesh, however, received lower FDI at $1.5 billion, according to the study.

PBC CEO Ehsan Malik said China had been the largest foreign investor in Pakistan over the past two to three years amid CPEC projects.

“The flow of FDI from Beijing, however, has slowed down in the wake of growing unfavourable working environment in Pakistan,” he said.

The flow of foreign investment was on the wane in the wake of law and order situation (particularly the security threat to Chinese nationals), low productively of labour and lack of free trade agreements with the potential trading partner countries and regions, Malik said.

“Low-cost labour is no more a sound indicator for attracting investment while labour productivity is a major drag.”

Pakistan’s labour productivity has continued to deteriorate for quite a long time. Now, it is less than the level in Bangladesh, Cambodia and Laos. When compared with China and Vietnam, the productivity level is far lower.

Secondly, Pakistan lacks the attraction for becoming a regional production base for any high potential investor.

“To become a regional base, it is a must to get market access across the region, like Vietnam, which has struck free trade agreements … with eight to ten countries and regions including the US, European Union, the UK (after Brexit) and Central Asian Republics while it is also a member of Asean (Association of Southeast Asian Nations) and RCEP (Regional Comprehensive Economic Partnership).”

Pakistan is lagging behind in a number of investment parameters and the gap has widened over the years with the peer nations.­­

Published in The Express Tribune, July 10^th, 2022.

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